Richard L. Shockley

A Real Option in a Jet Engine Maintenance Contract

In This Issue: Valuation, Capital Budgeting, and Disclosure Enterprise Valuation Roundtable Presented by Ernst & Young 8 Panelists: Richard Ruback, Harvard Business School; Trevor Harris, Morgan Stanley; Aileen Stockburger, Johnson & Johnson; Dino Mauricio, General Electric; Christian Roch, BNP Paribas; Ken Meyers, Siemens Corporation; and Charles Kantor, Lehman Brothers. Moderated by Jeff Greene, Ernst & Young.

Managerial Career Concerns and Project Cycle Time in Capital Budgeting

We study a situation in which a manager, whose ability to select good projects is unknown a priori, proposes a project for funding. The managers superior can observe the information about project quality generated by the manager, but cannot observe the resources devoted by the manager to generate that information. We show that a reputation-conscious manager will overinvest in information about the project, relative what the firms shareholders would like, and that this leads to an excessively long product-development cycle time. Possible organizational responses to this distortion are discussed and empirical implications drawn out.