Testing the sunk cost effect in publicly traded manufacturing companies
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Author(s)Atul RaiLink to ORCID Index: http://orcid.org/0000-0001-7813-6117
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Joseph KersteinLink to ORCID Index: https://orcid.org/0000-0002-6936-3841
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Steven M. FarmerLink to ORCID Index: https://orcid.org/0000-0002-3849-0565
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DOIhttp://dx.doi.org/10.21511/imfi.22(4).2025.22
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Article InfoVolume 22 2025, Issue #4, pp. 276-288
- 15 Views
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1 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Type of the article: Research Article
Abstract
Investment efficiency is crucial for investors and creditors. This study examines whether managers of publicly traded manufacturing firms exhibit sunk-cost bias in capital expenditure decisions. Economic theory dictates that sunk costs – unrecoverable past expenditures – should be ignored in forward-looking decisions. Depreciation expense, which allocates historical capital expenditures under GAAP, represents such a sunk cost, yet limited empirical research tests whether it systematically influences capital replacement decisions.
Using regression analysis with Compustat data for U.S. manufacturing firms from 2003–2024, we examine whether capital expenditures are predicted by past depreciation expenses, controlling for established economic determinants including Tobin’s Q, cash flow, growth opportunities, and firm characteristics. Manufacturing firms are selected due to their heavy reliance on capital assets and substantial depreciation expenses.
The results provide strong evidence of sunk-cost bias: higher depreciation expense predicts significantly larger future capital investments, controlling for economic fundamentals. The depreciation coefficient is positive (0.0158) and highly significant (p < 0.01), contributing meaningfully to explained variance beyond traditional predictors. These findings suggest managers allow accounting allocations to influence economic decisions, affecting optimal asset replacement timing.
The findings alert investors that managerial capital allocation may be suboptimal and influenced by accounting measures rather than purely economic considerations. This bias may cause over-investment when depreciation is high and under-investment when depreciation is low, potentially affecting firm value and competitive positioning.
- Keywords
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JEL Classification (Paper profile tab)G31, G40, L25, M41
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References41
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Tables4
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Figures0
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- Table 1. Sample distribution across industries
- Table 2. Descriptive statistics and Pearson correlation coefficients
- Table 3. Regression results
- Table 4. Granger causality test
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The risk management practices in the manufacturing SMEs in Cape Town
Problems and Perspectives in Management Volume 15, 2017 Issue #2 (cont. 2) pp. 386-403 Views: 4373 Downloads: 831 TO CITE АНОТАЦІЯRisk management is one of the prominent issues which are pivotal to the success of a business and may adversely affect profitability if not properly practised. Therefore, the main objective of this paper was to determine risk management practices in manufacturing SMEs in Cape Town. The research conducted was quantitative in nature and constituted the collection of data from 74 SME leaders, all of whom had to adhere to a list of strict delineation criteria. All data collected were thoroughly analyzed through means of descriptive statistics. From the findings made, it is clear that SMEs in the manufacturing sector do in fact understand risk management initiatives applicable to ‘manage’ their respective businesses towards sustainability, but not to a large extent. It was found that respondents are unaware of the elements which make risk management effective, which ultimately aids to the development of problems for SMEs. All employees, managers and owners must coordinate their efforts together to identify and manage organizational risks within their ambit to obtain total risk coverage, as well as provide assurance that these risks are effectively managed from a coordinated approach. Further studies may be carried out to identify measures that can be taken to improve the effectiveness of risk management practices in SMEs.
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Understanding the preference of individual retail investors on green bond in India: An empirical study
Dhaval Prajapati , Dipen Paul ,
Sushant Malik 
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Dharmesh K. Mishra
doi: http://dx.doi.org/10.21511/imfi.18(1).2021.15
Investment Management and Financial Innovations Volume 18, 2021 Issue #1 pp. 177-189 Views: 3747 Downloads: 1469 TO CITE АНОТАЦІЯThe biggest challenge facing countries, including India, is creating and managing an LCR (low carbon resilient) economy, which balances the need for high growth rates and is environmentally sustainable. The green bond market provides investors the means to help change the economy into an LCR economy. The study was undertaken to understand the key drivers and the factors influencing the individual retail investor’s decision to invest in green bonds. A survey instrument was designed and administered through the snowball sampling technique to 125 Indian respondents of various age groups who were eligible to invest in the Indian bond market. SPSS software was used to conduct a descriptive analysis followed by regression and conjoint analyses. The study results suggest that the Environmental, Social, and Governance (ESG) rating and credit rating of the green bond issuers are the key factors that influence an individual’s investment decision. The findings also highlight that incentives such as tax exemptions and awareness of green bonds also affect an investor’s decision. This research stands out as one of the first attempts to understand the Indian retail investors’ perception of a green bond.
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Influence of news on rational decision making by financial market investors
Shantha Gowri B.,
Vedantam Seetha Ram
doi: http://dx.doi.org/10.21511/imfi.16(3).2019.14
Investment Management and Financial Innovations Volume 16, 2019 Issue #3 pp. 142-156 Views: 3332 Downloads: 831 TO CITE АНОТАЦІЯThe impact of news on individual investor decision is explicit as investors need to update, adapt and forecast returns with constraints of time, uncertainty and resources to be successful. The aim is to understand and review the influence of news on individual investor’s decision making in stock markets and identify the impact of different type of news on individual investor’s decision making in stock markets, assess the behavioral reaction and investment decisions made by investors before and after there is news item, identify the linking effect on behavioral theories and biases, develop a generalized decision making conceptual model to understand the impact of news on investor’s reaction, decision and its linkages along with the behavioral bias. Theoretical basis/methodology for processing of news by investors is assumed to be based on Broadbent’s filter theory (1958) and due to cognitive informational inefficiency of investors it assesses the attention and the investor’s reaction of overreaction and underreaction, which do not comply with efficient market hypothesis theory. The reasons for its noncompliance are found by relating it with behavioral theories. The results explain how investor screens with filters and give attention to news only when it affects their portfolio or investment objective and strategies. It is concluded that investor’s decision making depends on degree of information penetration, information content, information influence, specific internal factors and generic external and on investors prevailing at that given circumstances. This gives us the solution to comprehend the investor’s reaction, decision and unresolved reversals, short- and long-term overreaction.
