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Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting
Author(s) -
ALMAZAN ANDRES,
CHEN ZHAOHUI,
TITMAN SHERIDAN
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12526
Subject(s) - investment (military) , capital budgeting , business , stakeholder , investment decisions , work (physics) , microeconomics , capital (architecture) , industrial organization , capital investment , economics , finance , management , behavioral economics , mechanical engineering , archaeology , politics , project appraisal , political science , law , history , engineering
This paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.