Management Accounting Section Midyear Meeting

Capital Budgeting Decisions, Cash Flow Forecasts, and Management Accountants’ Motivated Reasoning: A Field Study

• In Event: Budgeting and Target Setting (Mixed Methods)

Abstract

Management accountants who prepare undisclosed cash flow forecasts for capital budgeting
decisions may have decision preferences that lead to motivated reasoning. This paper
investigates whether and how this may occur. We conducted a field study in a management
accounting department in product development in a car company. We describe two detailed
episodes around the technical design of new cars, preparation of cash flow forecasts, and
decisions on capital investment projects. We develop and provide empirical evidence for a
theoretical framework that builds on key elements of motivated reasoning: directional
preferences, normative ambiguity, and justification. The framework includes four ways in
which accountants may exploit normative ambiguity for motivated reasoning. It also describes
four ways for accountants to create justification for their conclusions by showing comparisons.
Finally, we propose a possible cause of the accountants’ decision preferences in the context of
capital budgeting.

Author

• Marc Wouters, Karlsruhe Institute of Technology