Advanced Search
MyIDEAS: Login to save this paper or follow this series

Capital Allocation in Mult-Division Firms: Hurdle Rates vs. Budgets

Contents:

Author Info

  • Robert A. Taggart, Jr.
Registered author(s):

    Abstract

    It is common practice for firms to ration capital funds to their divisions, rather than set a price and let the divisions use as much as they want. This appears to be true even when the overall firm faces no rationing in the capital market. This paper offers an interpretation of this phenomenon based on Martin Weitzman's "Prices vs. Quantities" model. It is found that a rationing systemis advantageous when division managers do not perceive the full consequences of their investment decisions for the firm as a whole. By contrast, a pricing system for allocating capital among divisions would be favored when the division managers possess valuable information that cannot be costlessly communicated to headquarters. It is then argued that actual capital budgeting practice in many firms reflects a mixture of these two systems and can thus be interpreted as an attempt to reap both kinds of benefits at once.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w1213.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1213.

    as in new window
    Length:
    Date of creation: Oct 1983
    Date of revision:
    Publication status: published as Taggart, Robert A., Jr. "Capital Allocation in Multi-Division Firms: Hurdle Rates vs. Budgets," Journal of Financial Research, Vol. 10, No. 3, Fall 1987, pp. 177-189.
    Handle: RePEc:nbr:nberwo:1213

    Note: ME
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Carleton, Willard T, 1969. "Linear Programming and Capital Budgeting Models: A New Interpretation," Journal of Finance, American Finance Association, vol. 24(5), pages 825-33, December.
    2. Bower, Richard S & Lessard, Donald R, 1973. "An Operational Approach to Risk-Screening," Journal of Finance, American Finance Association, vol. 28(2), pages 321-37, May.
    3. Weingartner, H Martin, 1977. "Capital Rationing: n Authors in Search of a Plot," Journal of Finance, American Finance Association, vol. 32(5), pages 1403-31, December.
    4. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. M. Harris & C. H. Kriebel & A. Raviv, 1982. "Asymmetric Information, Incentives and Intrafirm Resource Allocation," Management Science, INFORMS, vol. 28(6), pages 604-620, June.
    6. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September.
    7. M. Therese Flaherty, 1981. "Prices Versus Quantities and Vertical Financial Integration," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 507-525, Autumn.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1213. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.