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

Management accountants who are preparing cash flow forecasts for capital budgeting decisions may have preferred conclusions that lead to motivated reasoning. Whereas previous research has mainly demonstrated antecedents of accountants’ motivated reasoning (e.g., client pressure), we look more closely at the phenomenon of accountants’ motivated reasoning itself. We conducted a field study in the 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: normative ambiguity and justification. The framework includes four ways in which accountants may exploit normative ambiguity for influencing their forecasts, and it contains four ways for accountants to create justification by showing comparisons.