Factors influencing managers' decisions to continue/discontinue capital budgeting projects

dc.contributor.authorIbrahim, Mohamed Tag Eldin
dc.date.accessioned2020-03-01T07:42:31Z
dc.date.available2020-03-01T07:42:31Z
dc.date.copyright2016
dc.date.issued2016
dc.descriptionThis article is licensed under Creative Commons License and full text is openly accessible in CUD Digital Repository. The version of the scholarly record of this article is published in Electronic Journal of Applied Statistical Analysis (2016), accessible online through this link https://doi.org/10.1285/i20705948v9n3p540.en_US
dc.description.abstractNormative decision theories stipulate that rational economic decisions (including investment decisions) are made based on the assessment of the expected outcomes. Accordingly, if available feedback information about an investment project indicates at any given point in time that the expected out- come would be negative, one would expect that such an investment project would be immediately terminated. This implies that any prior funds spent on an investment project that cannot be recovered (known as sunk costs) are considered irrelevant to the decision to terminate. However, the decision- making literature provides instances of entrapment or escalation where decision makers were in uenced by sunk costs in their decisions. The psychology literature provides two basic explanations for this entrapment or escalation behavior. The first explanation attributes the escalation behavior to the notion of self-justification and asserts that a decision-maker who is associated with the initial decision to invest in a project will elect to commit additional resources to the investment project as a way to justify past decisions, even when the available information indicates that the project should be terminated. The second explanation is rooted in prospect theory, which postulates that decision-makers tend to evaluate choices as gains and losses in relation to a neutral reference point and that decision-makers are generally risk seeking when faced with possible losses. That is, a risk-seeking person would reject a certain loss in favor of a gamble with equal or even "lower" expected value. Thus, for commitment escalation, the theory asserts that decision makers would view sunk costs as a sure loss and they would prefer to engage in the escalation of prior commitments with the possibility of incurring greater losses or recovering past investments. Agency theory provides a third explanation for escalation of commitments. When a manager posses private information on the state of the project, abandoning a potentially failing project would reveal this state and adversely affect the manager's reputation while further commitment of resources protects the manager's reputation. This paper extends previous work on the escalation of commitment by considering the effects of two additional variables that usually constrain managers' decisions. These variables are managers' potential liability for committing additional resources to a potentially failing project, and the level of credibility of a project's prospective information that the manager obtains. A between-subject experimental design is used where the three research variables (managers' responsibility, potential liability, and credibility of information about the prospects of a hypothetical project) are factorially crossed to obtain eight sets of experimental conditions (a 2x2x2 ANOVA design) The results indicate significant main effects of initial responsibility, potential liability, and information credibility. In addition, there were significant two-way interaction effects between initial responsibility and potential liability and information credibility. © Università del Salento.en_US
dc.identifier.citationIbrahim, M. E. (2016). Factors influencing managers’ decisions to continue/discontinue capital budgeting projects. Electronic Journal of Applied Statistical Analysis, 9(3), 540–551. https://doi.org/10.1285/i20705948v9n3p540en_US
dc.identifier.issn20705948
dc.identifier.urihttp://dx.doi.org/10.1285/i20705948v9n3p540
dc.identifier.urihttp://hdl.handle.net/20.500.12519/181
dc.language.isoenen_US
dc.publisherUniversity of Salentoen_US
dc.relationAuthor Affiliation: Ibrahim, M.E., Canadian University Dubai, P.O. Box 117781, Dubai, United Arab Emirates
dc.relation.ispartofseriesElectronic Journal of Applied Statistical Analysis;Vol. 9, no. 3
dc.rightsCreative Commons Attribuzione - Non commerciale - Non opere derivate 3.0 Italia License.
dc.rights.holderCopyright : 2016 Università del Salento
dc.rights.urihttps://creativecommons.org/licenses/by-nc-nd/3.0/
dc.subjectAnd Information Credibilityen_US
dc.subjectANOVAen_US
dc.subjectFactorial Designen_US
dc.subjectNormative Decision Theoryen_US
dc.subjectPotential liabilityen_US
dc.titleFactors influencing managers' decisions to continue/discontinue capital budgeting projectsen_US
dc.typeArticleen_US

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