The Influence of Affect on Managers' Capital‐Budgeting Decisions*

Abstract

In this paper, we propose that affective reactions are integral to accounting decision contexts like capital budgeting, and that researchers must jointly consider affect and cognition to better understand accounting decision makers' behavior. We argue that interpersonal relationships are characteristic of many capital‐budgeting contexts, and that these relationships can lead to emotional affective reactions. For example, reactions such as frustration and anger may result if a manager is treated unfairly by another individual involved in a capital project. Drawing on relevant work in neurobiology and psychology, we then predict that these affective reactions can influence managers' capital‐budgeting decisions. We report on four experimental scenarios that demonstrate the impact of affective reactions on capital‐budgeting decisions. Consistent with our predictions, the results indicate that managers consider both financial data and affective reactions when evaluating the utility of an investment alternative. Our results suggest that researchers should consider both affect and cognition to more fully understand decision making in accounting contexts.

Fifty-year overview of judgment and decision-making research in accounting

“…As discussed previously, Fisher et al (2000Fisher et al ( , 2002a found that fairness issues caused negotiators to make concessions, even when it was not in their best interests, and that perceptions of procedural fairness affected budgetary performance. Kida et al (2001) and Moreno et al (2002) found that perceptions of unfair treatment affected managers' capital investment decisions, and Williamson (2008) found that employees who perceived their environment to be fair contributed more to firm value. Cohen et al (2007) found that employees were less likely to invest opportunistically when they perceived the action to be unfair, even when they had both the opportunity and incentive to do so.…”

Economic consequences of firms’ depreciation method choice: Evidence from capital investments

“…For example, Kida et al (2001) find that affective reactions cause managers to select capital investment options that have lower net present values than other investment options under consideration. Moreno et al (2002) find that the effect of gain/loss domains on managers' capital investment decisions is overwhelmed by managers' affective reactions.…”

“…A number of experimental studies document that managers' capital investment decisions are influenced by factors of a non-economic nature (Kida et al, 2001;Moreno et al, 2002;Sawers, 2005;Staw, 1976), but it is not clear whether the results of those studies persist in real-world settings that involve actual economic consequences to both managers and their firms. This study identifies an additional determinant of managers' capital investment decisions (i.e., firms' depreciation method choice) that is of non-economic nature and provides archival evidence that this determinant influences managers' capital investment decisions.…”

The impact of strategy communications, incentives and national culture on balanced scorecard implementation

“…For example, when applying a balanced scorecard (BSC) approach to the capital budgeting decision, a balance scorecard strategy mandates decision disaggregation into independent elements, assessment of each disaggregated element and then reaggregation of element assessments to yield a final decision. Thus, the decision-maker must evaluate each investment option on multiple criteria and then apply importance weights to each criterion (Anderson, 2003;Kida, Moreno, & Smith, 2001). Having to choose between alternatives with different features requires value trade-offs and is a definition of a difficult decision task (Beattie & Barlas, 2001;Kaplan, Petersen, & Samuels, 2007;Lazarus, 1991;Luce, 1998;Sawers, 2005).…”