ALLOCATING CAPITAL AMONG A FIRM'S DIVISIONS: HURDLE RATES VS. BUDGETS

Robert A. Taggart

45 citations0/0 files storedThe Journal of Financial Research

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Corporate Finance and Governance Accounting and Organizational Management Capital Investment and Risk Analysis

Abstract

Abstract This paper examines the merits of alternative systems for allocating capital within a firm. A budget system, whereby top management limits divisional investment, even without full knowledge of the divisions' investment opportunities, can make economic sense. The budget system can be useful when there are externalities among the investments of different divisions and when division managers' estimates of projects' NPVs are subject to unpredictable errors. The budget system is weak, however, in terms of its use of division managers' expertise. As a result, most firms use budgets as only one part of their capital allocation system.

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References

1981Principles of Corporate Finance.1974Prices vs. Quantities 1984Finance Theory and Financial Strategy 1955Three Problems in Rationing Capital 1964Mathematical Programming and the Analysis of Capital Budgeting Problems.1977A Survey of Capital Budgeting Techniques Used by Major U.S. Firms 1978Optimal rewards for economic regulation 1975The Capital Expenditure Decision-Making Process of Large Corporations

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2007Relational delegation 2007Cost Allocation for Capital Budgeting Decisions 1997The misapplication of capital investment appraisal techniques 1996UK capital budgeting practices: some additional survey evidence 2011Capital Allocation and Delegation of Decision-Making Authority within Firms 2006Capital budgeting for new projects: On the role of auditing in information acquisition 2012

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