University of Illinois Urbana-Champaign

An investment center vs. a profit center: Capital investment under informational asymmetry

Chung, Moon-Chong

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https://hdl.handle.net/2142/19912

Description

Title
An investment center vs. a profit center: Capital investment under informational asymmetry
Author(s)
Chung, Moon-Chong
Issue Date
1992
Doctoral Committee Chair(s)
Kwon, Young K.
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
  • Business Administration, Accounting
  • Economics, Commerce-Business
  • Economics, Theory
Language
eng
Abstract
  • The choice problem between a profit and an investment center revolves around whether it is desirable to delegate investment decision responsibility to a divisional manager who is better informed about the investment opportunities of the division. We show that an accounting performance measure has a limited informational role for delegation in the sense that a cost involved in controlling the manager's incentives in relation to his private information for delegation is so high under certain conditions that an investment center cannot be supported as the optimal investment plan.
  • Among profit center designs, one involving the possibility of underinvestment is chosen to avoid the information control cost. Alternatively, one involving the possibility of overinvestment is chosen since it improves the informativeness of the performance measure for the information control. By explicating the impact on the cost of delegation of the profitability of an ex post suboptimal investment choice which the principal wishes to prevent through delegation, we show that, ceteris paribus, a firm with a higher profitability of the suboptimal choice is more likely to find that an investment center is inferior to either design of a profit center.
Type of Resource
text
Permalink
http://hdl.handle.net/2142/19912
Copyright and License Information
Copyright 1992 Chung, Moon-Chong

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