Corporate capital allocation: a behavioral perspective and guidance for future research

Abstract

PurposeThe purpose of this integrative review is to develop a holistic behavioral framework on capital allocation decisions.Design/methodology/approachThe article first structures, maps and synthesizes the prevalent cognitive biases that are present during capital allocation decisions. It then seeks to offer a robust understanding on how firms can mitigate the effects of cognitive biases.FindingsNot only do several cognitive biases interfere with a decision-makers ability to make adequate capital allocation decisions but firms already have a number of tools at their disposal to mitigate them.Research limitations/implicationsBesides identifying cognition- and repair-based implications to extend the literature, this article outlines key methodological challenges for future research conducted along the lines of capital allocation.Practical implicationsSince the paper structures cognitive limitations in one of the most important managerial decision-making processes and discusses what firms can do to counteract them, it is of high relevance for practitioners. Managers need to know what drives successful capital allocation and what not.Originality/valueThe article provides a rare integrative review on the impact of cognitive biases on capital allocation and addresses the need to build linkages to the ongoing conversation on how to design strategic decision processes.