Harris is the Chicago Board of Trade Professor of Finance and Business Economics, Graduate School of Business, University of Chicago. Raviv is the Alan E. Peterson Professor of Finance, Kellogg Graduate School of Management, Northwestern University. We thank David Hirshleifer, Ronen Israel, Raghuram Rajan, Lars Stole, and an anonymous referee for detailed comments, and Stan Baiman, Ron Dye, Mike Fishman, Tom Lys, Andy Winton, and Bill Rogerson for helpful discussions. We also thank seminar participants at Carnegie Mellon, Chicago, Columbia, Florida, Northwestern, the Western Finance Association Annual Meetings, and the Summer in Tel Aviv Finance Conference for comments and suggestions.
The Capital Budgeting Process: Incentives and Information
Article first published online: 30 APR 2012
1996 The American Finance Association
The Journal of Finance
Volume 51, Issue 4, pages 1139–1174, September 1996
How to Cite
HARRIS, M. and RAVIV, A. (1996), The Capital Budgeting Process: Incentives and Information. The Journal of Finance, 51: 1139–1174. doi: 10.1111/j.1540-6261.1996.tb04065.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.