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Title:An investment center vs. a profit center: Capital investment under informational asymmetry
Author(s):Chung, Moon-Chong
Doctoral Committee Chair(s):Kwon, Young K.
Department / Program:Accountancy
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Business Administration, Accounting
Economics, Commerce-Business
Economics, Theory
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.
Issue Date:1992
Rights Information:Copyright 1992 Chung, Moon-Chong
Date Available in IDEALS:2011-05-07
Identifier in Online Catalog:AAI9305493
OCLC Identifier:(UMI)AAI9305493

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