Mitigating the Impact of Managerial Anchoring: The Case for Management by Committee for Major Corporate Financial Decisions

Padmanabhan, Prasad; Zhang, Wenqing; Huang, Chia-Hsing

Volume 17, Numbers 3 & 4 / September/December , Pages 149-369

Multinational Finance Journal, 2013, vol. 17, no. 3/4, pp. 341-369

Prasad Padmanabhan , St. Mary’s University, USA Corresponding Author

Wenqing Zhang , SolBridge International School of Business, South Korea
Chia-Hsing Huang , SolBridge International School of Business, South Korea

Abstract:
Today, firms are facing a globally competitive environment. Against this backdrop, firms can ill afford to make mistakes in their capital budgeting and acquisition decisions. When making major decisions, firms may be faced with additional costs associated with managerial anchoring. Using simulation results, it is shown that firms making off-shoring decisions can be better off using two or more managers when managerial anchoring can lead to significant cost increases. This paper shows the conditions under which management by committee can involve higher incremental costs, but are offset by decreased anchoring costs if managers anchor in different directions. It is also shown that firms cannot completely eliminate the impact of anchoring even if they hire an infinite number of managers. Firms should consider hiring additional managers in instances where major decisions are involved, if the incremental cost of hiring the additional manager is offset by decreased anchoring costs.

Keywords : behavior finance; anchoring; manager; financial decision
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