Sabotage in capital budgeting: The effects of control and honesty on investment decisions

Markus Brunner, Andreas Ostermaier*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This study investigates the sabotage of investments in response to hurdle contracts as a means of formal control in capital budgeting. We conduct a laboratory experiment to examine factors that drive or inhibit sabotage. Sabotage occurs when the manager provides false information to prevent the firm from realizing a profitable investment, which is costly both for the manager and the firm. Our results show that managers sabotage investments to reciprocate for distrustful formal control. Conversely, budget communication that requires factual assertions and thus activates managers' preference for honesty inhibits sabotage. Moreover, honesty suppresses negative reciprocity and thus reduces sabotage not only directly but also indirectly. Our findings warn firms to consider the sabotage of investments as a hidden cost of control in budgeting. They show that honesty has a spill-over effect, as it absorbs negative reciprocity.

Original languageEnglish
JournalEuropean Accounting Review
Volume28
Issue number1
Pages (from-to)71-100
ISSN0963-8180
DOIs
Publication statusPublished - 2019
Externally publishedYes

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  • Related Prizes

    Walther Rathenau Award

    Ostermaier, Andreas (Recipient), 16. Sep 2016

    Prize: Prizes, scholarships, distinctions

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