Budgeting Decisions Research Articles

Capital Budgeting Practices in Financial Institutions (FIs): An Empirical Study in the Case of Ethiopia

Capital budgeting is the process that requires planning for setting up budgets on projects expected to have long-term implications, which is used as a standard for decision making for any organization. This study attempts to explore the capital budgeting practices in FIs and to ascertain if they had guidelines for capital budgeting techniques. The finding shows that, even if the firms in the sector have made significant investment on long-term assets only 42.9% of the firms were properly practiced the modern approaches of investment evaluation methods. Moreover, the most commonly used long-term investment evaluation techniques were PBP, NPV and IRR respectively. On the other hand, except one firm, which conducts partial analysis about the feasibility, almost all other firms in the sector did not make detail evaluation about the feasibility of investment while opening new branches which similar to study conducted by Eyob Dagne (2010). Similarly, the study also found negligence on the application of cost of capital as most firms were found using the cost of debt while discounting their cash flows despite the fact that most firms were found financing their projects using both debt and equity. In a similar vein, less than 30% of firms in the sector, of those apply capital budgeting techniques while evaluating long-term assets, used risk evaluation approaches. On top of this, inflation is also an area where firms have not paid much attention in their capital budgeting decision making. The study concluded by opening area for further research on how capital budgeting could be used for efficient resource allocation in the process of budgeting in developing countries.

The Branding Effect of Sponsored Search Advertising: Value-per-Click vs. Value-per-Impression

Advertising efforts mainly aim to build broader brand image and increase sales. In the online context, widely-successful sponsored search advertising (SSA), which predominantly employs performance-based schemes (e.g., pay-per-click), has been largely treated as a direct-selling mechanism. Recent empirical studies, however, have revealed the significant branding effect in SSA. Research investigating the branding effect and its interplay with the well-studied direct response effect is urgently called for. This paper is among the first attempts to formalize both types of advertising effects and the related budget decisions. One key element of our optimal control-based formulation is extending classical advertising response functions to capture the direct response and branding effects. Based on this formulation, we have derived the closed-form optimal budget policy. Both theoretical analyses and computational experiments have been performed. Our analytical results indicate that the advertiser's optimal budget decisions can be substantially different when the branding effect is explicitly considered. We also reveal experimentally that the optimal budgets for the advertisers with varying degrees of emphasis on branding can be substantially different. The reported work has important managerial implications. For online advertisers intending to promote (either exclusively or in combination with direct response) brand awareness and image, our work provides an analytical framework to facilitate their budgeting decisions and provide a closed-form solution. For search service providers such as Google, the reported work points to interesting opportunities in developing new business models and refining sponsored search market designs.

The Technology Trade-Off: The Cost of Software Development and its Implications for Start-Ups

Survival in the mobile age requires almost every company and organization to invest in a digital presence. At the same time, new digital security threats mean that the costs of this investment are becoming preclusive, especially for smaller firms and start-ups. This is compounded by the fact that economics will continue to be in programmers’ favor for many years to come. Demand will outstrip supply for the foreseeable future, adversely affecting US innovation and productivity. Until recently, outsourcing has been an affordable, although risky, option for cash strapped organizations. However, many traditional off-shore talent pools have also seen steep increases in cost. This paper will examine the current cost and risk environment facing start-ups and small firms. It will offer some recommendations both for start-ups navigating budgeting decisions, and policy maker attempting to alleviate the skills mismatch problem.

Local Governance and Redistributive Policy: Explaining Local Funding for Public Defense

In many American states, public defense is provided at the county rather than state level (Langton & Farole 2009). Local governments have discretion over implementing and funding the right to counsel, resulting in considerable variability in programs and funding levels. Placing this issue in the theoretical context of redistributive policies and politics, we investigate decisions on funding this service across upstate New York counties. Using as a point of departure Paul Peterson's classic explication of community politics, we first model variation in funding as a function of counties' fiscal capacity, need for services, and costs of supplying legal representation. We also test Peterson's prediction that local political factors will play little if any role in budget decisions. Second, through interviews with program administrators we explore the characters of twelve defender programs in which expenditures departed from the model's predictions. We find that three factors—which we term “influence,” “infrastructure,” and “ideas”—also vary directly with levels of funding. We conclude with a discussion of the implications of these findings for theoretical thinking about due process policies and local politics, and for policy debate over how best to ensure adequate counsel in criminal court.

Should There be Laws Mandating Nurse Practitioner/Patient Ratios?

Should There be Laws Mandating Nurse Practitioner/Patient Ratios?

An Assessment of Factors Important to Legislators in Budget Decisions; How Much Impact Can Agencies Have?

Budget deliberations represent a dynamic interaction between many actors, including agency officials and legislators. There may be opposing perceptions about the relative importance of various types of information and there are likely many priority items that legislators base their decisions on, which budget officials may, or may not, have the ability to impact or control. Through a survey of state legislators, we first determined the relative importance of 27 items in approving budget proposals. Agency officials were surveyed and asked to rate the degree that they can impact each of the 27 items. We considered how the difference in party affiliation of legislators relates to the type of information they view as important in budget decisions. We then compared the importance ratings of legislators with the impact ratings of budget officials, which led to some recommendations aimed at agency officials.

Robust Dynamic Estimation

Managing marketing resources over time requires dynamic model estimation, which necessitates specifying some parametric or nonparametric probability distribution. When the data generating process differs from the assumed distribution, the resulting model is misspecified. To hedge against such a misspecification risk, the extant theory recommends using the sandwich estimator. This approach, however, only corrects the variance of estimated parameters, but not their values. Consequently, the sandwich estimator does not affect any managerial outcomes such as marketing budgeting and allocation decisions. To overcome this drawback, we present the minimax framework that does not necessitate distributional assumptions to estimate dynamic models. Applying minimax control theory, we derive an optimal robust filter, illustrate its application to a unique advertising data set from the Canadian Blood Services, and contribute several novel findings. We discover the compensatory effect: Advertising effectiveness increases and the carryover effect decreases as robustness increases. We also find that the robust filter uniformly outperforms the Kalman filter on the out-of-sample predictions. Furthermore, we uncover the existence of a profit-volatility trade-off, similar to the returns-risk trade-off in finance, whereby the volatility of profit stream decreases at the expense of reduced total profit as robustness increases. Finally, we prove that, unlike for-profit companies, managers of nonprofit organizations should optimally allocate budgets opposite the advertising-to-sales ratio heuristic; that is, advertise more (less) when sales are low (high). Data and the web appendix are available at https://doi.org/10.1287/mksc.2016.1010 .

Community cost-benefit discussions that launched the Camino Verde intervention in Nicaragua

BackgroundRecent literature on community intervention research stresses system change as a condition for durable impact. This involves highly participatory social processes leading to behavioural change.MethodsBefore launching the intervention in the Nicaraguan arm of Camino Verde, a cluster-randomised controlled trial to show that pesticide-free community mobilisation adds effectiveness to conventional dengue controls, we held structured discussions with leaders of intervention communities on costs of dengue illness and dengue control measures taken by both government and households. These discussions were the first step in an effort at Socialising Evidence for Participatory Action (SEPA), a community mobilisation method used successfully in other contexts. Theoretical grounding came from community psychology and behavioural economics.ResultsThe leaders expressed surprise at how large and unexpected an economic burden dengue places on households. They also acknowledged that large investments of household and government resources to combat dengue have not had the expected results. Many were not ready to see community preventive measures as a substitute for chemical controls but all the leaders approved the formation of “brigades” to promote chemical-free household control efforts in their own communities.ConclusionsDiscussions centred on household budget decisions provide a good entry point for researchers to engage with communities, especially when the evidence showed that current expenditures were providing a poor return. People became motivated not only to search for ways to reduce their costs but also to question the current response to the problem in question. This in turn helped create conditions favourable to community mobilisation for change.Trial registrationISRCTN27581154.

Editorial Note

Editorial Note

Catching the curl: Wavelet thresholding improves forward curve modelling

Modelling futures term structures (price forward curves) is essential for commodity-related investments, portfolios, risk management, and capital budgeting decisions. This paper uses a novel strategy, wavelet thresholding, to de-noise futures price data prior to estimation in a state-space framework in order to improve model fit and prediction. Rather than de-noise the raw data, this method de-noises only wavelet coefficients linked to specific timescales, minimizing the amount of information that is accidentally removed. Our findings are that, for the first five futures maturities in our sample data, in-sample (tracking) and 5-day-ahead out-of-sample (forecasting) Root Mean Squared Errors (RMSEs) are smaller both (i) when we increase the number of factors from one to four, and (ii) when we de-noise the data using wavelet thresholding. The improvement due to wavelet thresholding is often greater than the improvement from adding one more factor to the model, which is important because going beyond four factors does not improve model fit. Wavelet-based de-noising thus has the potential to improve considerably the estimation of various economic time series models, helping practitioners and policymakers with better forecasting and risk management.

Recording Adverse Events Following Joint Arthroplasty: Financial Implications and Validation of an Adverse Event Assessment Form

BackgroundIn Ireland, funding of joint arthroplasty procedures has moved to a pay-by-results national tariff system. Typically, adverse clinical events are recorded via retrospective chart-abstraction methods by administrative staff. Missed or undocumented events not only affect the quality of patient care but also may unrealistically skew budgetary decisions that impact fiscal viability of the service. Accurate recording confers clinical benefits and financial transparency. The aim of this study was to compare a prospectively implemented adverse events form with the current national retrospective chart-abstraction method in terms of pay-by-results financial implications. MethodsAn adverse events form adapted from a similar validated model was used to prospectively record complications in 51 patients undergoing total hip or knee arthroplasties. Results were compared with the same cohort using an existing data abstraction method. Both data sets were coded in accordance with current standards for case funding. ResultsOverall, 114 events were recorded during the study through prospective charting of adverse events, compared with 15 events documented by customary method (a significant discrepancy). Wound drainage (15.8%) was the most common complication, followed by anemia (7.9%), lower respiratory tract infections (7.9%), and cardiac events (7%). A total of €61,956 ($67,778) in missed funding was calculated as a result. ConclusionThis pilot study demonstrates the ability to improve capture of adverse events through use of a well-designed assessment form. Proper perioperative data handling is a critical aspect of financial subsidies, enabling optimal allocation of funds.

The sentiment premium and macroeconomic announcements

Limits to arbitrage imply that market-wide investor sentiment should be a priced factor in the US equity market. While previous studies (Baker and Wurgler in J Financ 61:1645–1680, 2006) focus on the factor loading on market-wide investor sentiment, we study its factor premium in the present paper. This is important, because both factor loadings and premiums are required to estimate expected returns on stocks, which are essential for capital budgeting, portfolio evaluation, investment, and risk analysis decisions. If overpricing is more prevalent than underpricing (Stambaugh et al. in J Financ Econ 104:288–302, 2012), the premium on market-wide investor sentiment should be negative. Furthermore, the sentiment premium should be particularly significant on days without macroeconomic announcements, because there is a lack of information about the state of the economy at such times. We test these hypotheses in this paper, and find supporting evidence. Our findings have important theoretical as well as practical implications.

St Croix oil refinery: choosing the right future

Synopsis Atlantic Basin Refining, Inc. (ABR), a Virgin Islands company located on the island of St Croix, reached a tentative agreement with Hess and Petroleos de Venezuela SA to purchase the two companies’ joint venture, Hovensa, LLC in November 2014. Hovensa operated the large St Croix oil refinery that had been closed since 2012, but the deal required approval by the Virgin Islands Senate. Although reopening the large refinery would generate a significant boost to the local economy, past operating losses, and financial and legal issues associated with Hovensa, raised concerns about the feasibility of ABR’s proposal. The case is set in late 2014 as the government is working to ensure that the decision to allow ABR to purchase the refinery reflects the long-term interests of the Virgin Islands. Research methodology The case was researched using secondary data and all materials are available to the public. This was necessary due to the ongoing legal battle concerning the refinery’s sale. No disguises of people or entities were used. Frequently cited sources include government and court records, newspaper articles, and internet sources. Relevant courses and levels The case is most appropriate for undergraduate courses in management or finance where capital budgeting decisions are analyzed. Theoretical bases The case draws on literature related to capital budgeting and management.

What Can Performance Information Do to Legislators? A Budget‐Decision Experiment with Legislators

AbstractStudies on the influence of performance information on budgeting decisions have produced contradictory findings. This article offers a framework of the parliamentary context that links performance information to legislators’ budgeting decisions. The framework suggests that the impact on politicians’ allocations will differ depending on whether performance information is reflected in the budget proposal, whether the allocation issue concerns a politically difficult trade‐off for the decision maker, and whether information falls into a receptive partisan mind. The experimental study uses 57 actual legislators. The results show that the introduction of performance information into legislators’ deliberation process leads to stronger deviations from the status quo allocation. This difference occurs because performance information highlights more clearly the expected consequences of budgetary changes and allows for more pronounced reactions. More informed decisions, however, might make compromise among legislators more difficult because individual positions will become more polarized.

Spending reviews in Ireland – Learning from experience

This article examines the Irish experience of spending reviews and seeks to identify key lessons that should enhance the effectiveness of this process both in Ireland and in other OECD countries. Since the beginning of the economic and financial crisis, spending reviews have played an important role in Ireland’s efforts to restore expenditure policy to a more sustainable footing. However, the purpose of future reviews will move from improving the deficit position to ensuring all expenditure is considered when Government is making budget decisions. The purpose of spending reviews is to increase the fiscal space available to government for new, high priority, policies. By systematically examining baseline expenditure using available evidence and data, the increasing tendency to focus only on incremental improvements in expenditure can be countered. Spending reviews should be used to further embed the principles of expenditure efficiency and effectiveness into the wider budget process. This can be facilitated through extending the availability of relevant evaluations and performance information and ensuring such evaluations become central to the budgetary process.

Protecting biodiversity by developing bio-jobs: a multi-branch analysis with an illustration using French data

We refer to jobs that promote biodiversity as bio-jobs. These jobs are located in a small number of sectors generally linked to natural resources: naturalist research, forestry, public works, water and waste management, etc. In this article, we examine two economic policies favouring the development of these bio-jobs. The government can support demand in sectors with bio-jobs through public procurement or can develop them through targeted exemptions. The most effective and relevant combination of these instruments is investigated via an original framework. We show that the government's action is driven by the nature of the sectors and especially by the level of any existing private demand. Then, the level of the wages plays a major role in the government's budget decision. Finally, we apply these recommendations to French data.

Protecting biodiversity by developing bio-jobs: a multi-branch analysis with an illustration using French data

We refer to jobs that promote biodiversity as bio-jobs. These jobs are located in a small number of sectors generally linked to natural resources: naturalist research, forestry, public works, water and waste management, etc. In this article, we examine two economic policies favouring the development of these bio-jobs. The government can support demand in sectors with bio-jobs through public procurement or can develop them through targeted exemptions. The most effective and relevant combination of these instruments is investigated via an original framework. We show that the government's action is driven by the nature of the sectors and especially by the level of any existing private demand. Then, the level of the wages plays a major role in the government's budget decision. Finally, we apply these recommendations to French data.

Capital Budgeting and Capital Structure Decisions in Saudi Arabia

Capital Budgeting and Capital Structure Decisions in Saudi Arabia

An Empirical Study on Financial Literacy and Spending Behavior of Rural Household in India

Financial literacy is a challenge in rural household people and remote population in India, also its plays a key role in an economic prospect. Financial knowledge mean ability to deal with everyday financial matters and make the right choice in spending, borrowing, budgeting, savings and investment decisions. Now-a-days access of financial service is decreasing and unnecessary spending is increasing from lower income people who are living in a rural area. Managing money is a vital element to achieve a quality life of individuals because spending habits will influence the managing money of people. The lower level of financial knowledge will contribute to poor financial decisions and that can be harmful to both individuals and society. This study examines levels of financial literacy and spending behaviors of rural household in India. The pilot study was conducted in India sample size of this study was 92. This study result reveals that Low level of financial literacy leads to poor in spending behavior of rural household individuals.

FEATURES OF INTERGOVERNMENTAL RELATIONS IN THE CONTEXT OF ACHIEVING FINANCIAL VIABILITY OF LOCAL COMMUNITIES

Introduction. In the conditions of the implementation of the government’s decentralization reform, local communities received the real opportunities for increasing the resources which can be used for development. One of the conditions, which provides their economic development, is to create an effective system of intergovernmental relations, aimed to optimizing fiscal decentralization and clear definition of the powers of local government. The increasing interest to the problem of expanding of local communities financial capacity caused by the necessity to find improved mechanisms for incomes separation between the elements of the budget system and types of budgets. Purpose. The purpose of this article is to study of intergovernmental relations in the context of achieving financial viability of local communities and to summarize the preliminary results of the reform. Results. The features of intergovernmental relations in local government reform in Ukraine are highlighted. The fiscal innovations, which extends the autonomy principles of local budgets, reallocates expenditure responsibilities between levels of government and creates conditions for intensification of the process of voluntary association of municipalities, have been analyzed. The first phase of fiscal decentralization in Ukraine has been estimated. It has been shown that despite the strengthening of the solvency of local budgets, the negative trends is intensified: excessive centralization of budgetary decisions; imperfect distribution of functional responsibilities and rights between the central and local governments; low human resource capacity of the community; low financial autonomy of local government and so on. The risks of the further deepening the fiscal decentralization have been justified. Conclusions. It was suggested the directions for increasing financial capacity of local communities in the introduction of industry standards of public services, which should increase the efficiency of planning and using of public funds at all levels; in the improving the basic and reverse subsidies calculations and in the estimation the risks of the fiscal decentralization.