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

Abstract

AbstractIn 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.