The effects of hurdle rates on the level of escalation of commitment in capital budgeting

Cheng, MM; Schulz, AK; Luckett, P; Booth, PJ

The effects of hurdle rates on the level of escalation of commitment in capital budgeting

Cheng, MM Schulz, AK Luckett, P Booth, PJ

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Publisher:: American Accounting Association
Publication Type:: Journal Article
Citation:: Behavioural Research in Accounting, 2003, 15 pp. 63 - 85
Issue Date:: 2003-01

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Field	Value	Language
dc.contributor.author	Cheng, MM	en_US
dc.contributor.author	Schulz, AK	en_US
dc.contributor.author	Luckett, P	en_US
dc.contributor.author	Booth, PJ https://orcid.org/0000-0001-7219-1502	en_US
dc.date.issued	2003-01	en_US
dc.identifier.citation	Behavioural Research in Accounting, 2003, 15 pp. 63 - 85	en_US
dc.identifier.issn	1050-4753	en_US
dc.identifier.uri	http://hdl.handle.net/10453/6482
dc.description.abstract	This study proposes that organizations should consider project hurdle rates, as part of their control system design, to reduce escalation of commitment behavior in managers. In particular, we empirically examined the escalation of commitment tendencies in managers receiving organization-set, self-set, and no hurdle rates.Consistent with prior expectations, we found self-set hurdle rates to be an effective control mechanism resulting in significantly lower levels of escalation of commitment. Contrary to expectations, however, organization-set hurdle rates were not effective. Self-set hurdle rates also resulted in significantly higher cut-off rates compared to the average return of the investment portfolio held by the managers.As escalation of commitment has been recognized as a serious potential problem in organizations, the use of self-set hurdle rates is a step toward reducing the level of escalation tendencies in managers	en_US
dc.publisher	American Accounting Association	en_US
dc.relation.ispartof	Behavioural Research in Accounting	en_US
dc.relation.isbasedon	10.2308/bria.2003.15.1.63	en_US
dc.title	The effects of hurdle rates on the level of escalation of commitment in capital budgeting	en_US
dc.type	Journal Article
utslib.citation.volume	15	en_US
utslib.for	150103 Financial Accounting	en_US
utslib.for	1501 Accounting, Auditing and Accountability	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
utslib.copyright.status	closed_access
pubs.consider-herdc	true	en_US
pubs.volume	15	en_US

Abstract:

This study proposes that organizations should consider project hurdle rates, as part of their control system design, to reduce escalation of commitment behavior in managers. In particular, we empirically examined the escalation of commitment tendencies in managers receiving organization-set, self-set, and no hurdle rates.Consistent with prior expectations, we found self-set hurdle rates to be an effective control mechanism resulting in significantly lower levels of escalation of commitment. Contrary to expectations, however, organization-set hurdle rates were not effective. Self-set hurdle rates also resulted in significantly higher cut-off rates compared to the average return of the investment portfolio held by the managers.As escalation of commitment has been recognized as a serious potential problem in organizations, the use of self-set hurdle rates is a step toward reducing the level of escalation tendencies in managers

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http://hdl.handle.net/10453/6482