Opening the Black Box of Companies’ Capital Investment Process

In spite of intensive academic research on capital expenditure efficiency, how firms make investment decisions remains largely a black box. We analyze that process by dividing it into two stages: budgeting of capital expenditures (CapEx) and execution of the budget. We find that these two stages have different effects on investment efficiency, and are in turn affected differently by accounting quality and governance. Further, while opportunistic managers massively exceed investment budgets, managers with high ability strategically find a level of execution errors that optimizes their compensation while remaining undetected by boards. These strategic execution deviations entail significant costs for their … Read more