Sunflower Management and Capital Budgeting

Authors

Arnoud W. A. Boot, University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen InstituteFollow
Anjan V. Thakor, Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial EngineeringFollow
Todd T. Milbourn, Southern Methodist University (SMU) - SMU Cox School of BusinessFollow

Publication Date

5-22-2002

Abstract

In organizations, it is often necessary to engage in costly delegation of ideas; such delegation seeks to efficiently aggregate multiple information signals. What this paper shows is that those who delegate often find it impossible to separate the evaluation of the ideas they delegate from the evaluation of the abilities of those who are delegated the task of assessing these ideas. This commingling of the assessment of the idea with that of the individual agent generates a tendency for the agent to ignore his own information and instead attempt to confirm the superior's prior belief. We refer to this as sunflower management. Beyond characterizing the effects of sunflower management on the delegation process, our analysis also allows us to extract implications of sunflower management for the use of centralized versus decentralized capital budgeting systems, and to explain why firms may overinvest capital even when managers have no innate preference for "empire building".

Document Type

Article

Keywords

Capital budgeting

Disciplines

Finance

DOI

10.2139/ssrn.321601

Source

SMU Cox: Finance (Topic)

Language

English