A Note on the Properties of Aggregate Evaluation of Budget Proposals

20 Pages Posted: 13 Aug 2011 Last revised: 15 Aug 2011

See all articles by Steven Schwartz

Steven Schwartz

SUNY at Binghamton - School of Management

Austin Sudbury

affiliation not provided to SSRN

Richard A. Young

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: August 12, 2011

Abstract

Agency research on capital budgeting has demonstrated that a principal can reduce information rents by contracting on several investment projects in aggregate rather than on each investment project individually. We investigate the robustness of this result in a model that facilitates comparative statics. We find that the relative advantage of aggregation over individual evaluation is maximized for intermediate levels of expected profitability and intermediate levels of the variability of profitability. We also explore the effects of correlated project outcomes. We find that if aggregation is beneficial, its benefit is decreasing in the correlation between the projects’ profitability. Applications of our results are discussed.

Keywords: budgeting, performance evaluation

JEL Classification: M4

Suggested Citation

Schwartz, Steven and Sudbury, Austin and Young, Richard A., A Note on the Properties of Aggregate Evaluation of Budget Proposals (August 12, 2011). AAA 2012 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1909038 or http://dx.doi.org/10.2139/ssrn.1909038

Steven Schwartz (Contact Author)

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

Austin Sudbury

affiliation not provided to SSRN ( email )

Richard A. Young

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-0889 (Phone)
614-292-2118 (Fax)

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