Theory suggests that debt financing, relative to equity financing, makes managers reluctant to part with assets. Our evidence supports this theoretical prediction, revealing that the reluctance to part with a debt financed asset causes two decision errors—(1) participants forego investments that increase firm value and (2) participants accept investments that decrease firm value. When the source of finance is equity, participants are less likely to make either of these costly decision errors. Further, we find that higher unpaid principal accentuates participants' reluctance to part with debt financed assets. Finally, the decision errors stem, in part, from the perception that an asset having a large unpaid principal balance has provided lower past benefits than an otherwise identical asset.

ABSTRACT Evidence reveals that managers exercise discretion over budget estimates, but little is known about whether revenues or expenses are more susceptible to budget discretion. Drawing upon regulatory focus theory, we predict a pattern of budget discretion that has not previously been identified. To test our theory, we conduct a series of experiments where managers face a goal to either minimize the performance metric to avoid missing the target (minimal budget goal) or maximize the performance metric to achieve a desired outcome (maximal budget goal). When managers face a minimal budget goal, they are more likely to make self-interested budget estimates for uncertain expenses than monetarily equivalent uncertain revenues. Conversely, when managers face a maximal budget goal, they are more likely to make self-interested budget estimates for uncertain revenues than monetarily equivalent uncertain expenses. Thus, managers prefer acts of inclusion over acts of exclusion when pursuing their budget goals. JEL Classifications: G31, M10, M40.