The Effects of Autonomy, Internal Control, and Accountability on Overconfidence in Capital Budgeting Decisions

Abstract

The purpose of this study is to investigate the effects of managers’ autonomy in choosing a capital budgeting project on their confidence in managing the project. Furthermore, this study examines the role of internal audit report and accountability in mitigating the impact of autonomy on managers’ resistance to abandon unprofitable capital budgeting projects. Building on the motivated reasoning theory, we hypothesize and find that managers who were given autonomy to choose their own projects are more confident that their project will be successful as compared to those who were assigned imposed the projects by their superiors. This study also shows that internal audit report and accountability are effective mechanisms to reduce the influence of prior decision on managers’ resistance to abandon the unprofitable projects.