Decision Sciences Journal
Volume 32, Number 3
Summer 2001
Opportunism in Capital Budget Recommendations: The Effects
of Past Performance and Its Attributions
Joanna L. Ho
Graduate School of Management, University of California, Irvine,
Irvine, CA 92717-3125, email: jlho@uci.edu
Sandra C. Vera-Muñoz
Department of Accountancy , 248 Mendoza College of Business,
University of Notre Dame, Notre Dame, IN 46556-5646, email: vera-munoz.1@nd.edu
ABSTRACT. This study uses an experiment to examine
the separate and combined effects of managers’ loss aversion
and their causal attributions about their divisions’ performance
on tendencies to make goal-incongruent capital budget recommendations.
We find that managers’ recommendations are biased by their
loss aversion. In particular, managers of high-performing divisions
are more likely than managers of low-performing divisions to
propose investments that maximize their division’s short-term
profits at the expense of the firm’s long-term value. We
also find that managers’ recommendations are biased by their
causal attributions. In particular, managers are more likely
to propose investments that maximize their division’s short-term
profits at the expense of the firm’s long-term value when
they attribute their division’s performance to external
causes (e.g., task difficulty or luck) rather than to internal
causes (e.g., managerial ability or effort). Further, the effects
of causal attributions are greater for managers of high-performing
divisions than for managers of low-performing divisions. The
study’s findings are important because loss aversion and
causal attributions are often manifested in firms. Thus, they
may bias managers’ decisions, which in turn may be detrimental
to the firms’ long-term value.
Subject Areas: Causal Attributions, Goal-Incongruence,
Long-term Firm Value Maximization, Managerial Loss Aversion,
Performance Evaluation, and Short-term Profit Maximization. |