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The Capital Budgeting Process: Incentives and Information

Milton Harris and Artur Raviv
The Journal of Finance
Vol. 51, No. 4 (Sep., 1996), pp. 1139-1174
Published by: Wiley for the American Finance Association
DOI: 10.2307/2329390
Stable URL: http://www.jstor.org/stable/2329390
Page Count: 36
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Capital Budgeting Process: Incentives and Information
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Abstract

We study the capital allocation process within firms. Observed budgeting processes are explained as a response to decentralized information and incentive problems. It is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low. We also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer.

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