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Overconfidence and Resistance to Abandoning Unprofitable Capital Budgeting Projects: The Effects of Autonomy, Internal Audit, and Accountability
Author(s) -
Jermias Johnny,
Hoi Hu Billy Kin
Publication year - 2020
Publication title -
accounting perspectives
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.238
H-Index - 17
eISSN - 1911-3838
pISSN - 1911-382X
DOI - 10.1111/1911-3838.12222
Subject(s) - accountability , autonomy , overconfidence effect , audit , business , accounting , resistance (ecology) , internal audit , capital budgeting , finance , political science , psychology , social psychology , ecology , law , biology , project appraisal
The purpose of this study is to investigate the effects of managers' autonomy in choosing a capital budgeting project has on their confidence in managing the project. Furthermore, this study examines the role that internal audit reports and accountability play in mitigating the impact of autonomy on managers' resistance to abandoning unprofitable capital budgeting projects. Building on motivated reasoning theory, we hypothesize and find that managers who are given autonomy to choose their own projects are more confident that their projects will be successful than managers who are assigned the projects by their superiors. This study also shows that internal audit reports and accountability are effective mechanisms for reducing the influence of prior decisions on managers' resistance to abandoning unprofitable projects.