Determinants and Consequences of Budget Reallocations: Evidence from the Consumer Goods Industry

Abstract

In this study, we investigate the determinants and consequences of budget reallocations, i.e., corrective actions to the budget made during the year. In particular, we analyze in how far allocation decisions regarding the initial budget drive subsequent reallocations, over and above the new information on economic factors that managers incorporate in their reallocation decisions. Using proprietary data of a large European consumer goods manufacturer, we hypothesize and find that deviations from the economically predicted initial budget influence the likelihood of budget cuts directly in the reallocation process in an attempt to increase efficiency, as well as indirectly via the influence on entities’ performance development during the year. In a more exploratory analysis, we show that such reallocations do not have the desired effects on market-place and financial performance. In particular, budget cuts are negatively associated with a product’s profitability, as well as the change in market share. More surprisingly, budget boosts do not have an (positive) effect on these performance indicators. Most importantly, our results demonstrate that efficient investment planning ex-ante is essential to achieve an improvement in performance, highlighting the value of budgeting.