Determinants and consequences of budget reallocations

We investigate the determinants and consequences of budget reallocations, i.e., corrective actions
to the budget made during the year. Using proprietary data of a large consumer goods
manufacturer, we analyze the extent to which allocation decisions regarding the initial budget drive
subsequent reallocations. Whenever scarce resources need to be allocated among a number of
individuals, power struggles and politicking behavior are likely to arise, which potentially affects
the outcome of the allocation process. We hypothesize and find that one important driver of
reallocation decisions is the firm's aim to correct for systematic deviations from the optimal initial
budget allocation that are driven by successful lobbying activities during the initial budgeting
process. In a more exploratory analysis, we show that such reallocations do not have the desired
effects on market-place performance. In particular, budget cuts are negatively associated with a
product's change in market share. More surprisingly, while budget boosts do help product lines
internally to achieve their sales targets in the last quarter, they do not have a (positive) effect on
the change in market share. Most importantly, our results demonstrate that efficient investment
planning ex ante is essential to achieve an improvement in market-place performance, highlighting
the value of budgeting.