Capital Commitment – Definition

Cite this article as:"Capital Commitment – Definition," in The Business Professor, updated October 10, 2019, last accessed October 27, 2020, https://thebusinessprofessor.com/lesson/capital-commitment-definition/.

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Capital Commitment Definition

A capital commitment generates many meanings depending on the context in which it is used.

In accounting, capital commitment refers to the total amount of money that a company intends to spend for a specific time. It is the capital expenditure forecasted by a company to spend on its long-term assets such as buildings, facilities, and equipment.

In the sale of stock, capital commitment refers to the number of securities a company has or is committed to putting up for sale.

A Little More on What is Capital Commitment

In a blind pool fund, capital commitment describes the investments that capital investors commit to contributing to the pool as requested by the fund manager. In a limited partnership, the capital that the general partner can request from limited partners refers to capital commitment.  Capital commitment refers to planned expenditure by organizations or businesses to settle regular operating expenses as well as future liability.

Funds that are held for a particular purpose such as investmnet purpose, expansion of business settling future liabilities and others. The size and operation of a business will determine the amount that will be set aside as capital commitment. A capital commitment is not the same as an incidental expense otherwise called contingencies.

Risks with Capital Commitment

There are several risks associated with capital commitments with the major one being the burden it puts on the finances of a business, especially when it is not properly planned. Despite that capital commitments are funds not yet released by the company in most cases, they can mount pressure on the accounts of a company, especially if there is overcommitment or under-commitment on the part of the company.

For instance, if a company under-commits, it means it might be unable to meet all future obligations and if it over-commits, a decrease in capital can have great impacts on the company.

As a way of hedging these risks, the capital commitment of a company can be viewed or accessed when its financial statements are released.

Capital Commitment in the Stock Market

In the stock market, the shares of an organizations that the organization commits to put u for sale refer to capital commitments. Capital commitment refer to shares of a company that are available for sale in the current market. Capital commitment in the stock market pose a bit of risk because the value of the shares are connected with market conditions as market factors affect the shares.

Capital Commitment in Private Equity

In private equity, the amount of funds that a venture capital investor promises to contribute to a venture capital fund when the manager requests it is a capital commitment. Therefore, the commitment that an investor makes to fund an investment for a specific period is capital commitment. This commitment can also be to contribute to fees requested by the fund manager.

Reference for ‚ÄúCapital commitment‚ÄĚ

https://en.wikipedia.org/wiki/Capital_commitment

https://www.investopedia.com ‚Äļ Small Business ‚Äļ Entrepreneurship

www.businessdictionary.com/definition/capital-commitment.html

https://en.wikipedia.org/wiki/Capital_commitment

https://dictionary.cambridge.org/dictionary/english/capital-commitment

Academic research on ‚ÄúCapital commitment‚ÄĚ

Capital commitment and profitability: an empirical investigation, Ghemawat, P., & Caves, R. E. (1986). Capital commitment and profitability: an empirical investigation. Oxford Economic Papers, 38, 94-110.

Capital commitment¬†and Cournot competition with labour‚Äźmanaged and profit‚Äźmaximising firms, Lambertini, L., & Rossini, G. (1998). Capital commitment and Cournot competition with labour‚Äźmanaged and profit‚Äźmaximising firms.¬†Australian Economic Papers,¬†37(1), 14-21. The behaviour of labour managed and profit seeking firms in a Cournot duopoly with capital strategic interaction is analysed. When a pure labour managed duopoly is considered, firms choose their capital commitments according to the level of the interest rate, unlike what usually happens when only profit maximising firms operate in the market. If we consider a mixed duopoly, the profit maximising firm under‚Äźinvests while the labour managed firm over‚Äźinvests regardless of the rental cost of capital

Capital, commitment, and entry equilibrium, Eaton, B. C., & Lipsey, R. G. (1981). Capital, commitment, and entry equilibrium. The Bell Journal of Economics, 593-604. A primary concern of recent oligopoly literature has been the use of product-specific capital to impose asymmetric market solutions, including the deterrence of entry. This article explores the surprisingly neglected topic of the correspondence between the nature of product-specific capital (PSC) and the properties of entry equilibrium. The nature of PSC determines the type of entry with which firms must be concerned (predatory entry, where the entrant replaces an existing firm, or augmenting entry, where the entrant does not), the instruments available to effect asymmetry, the ability to impose asymmetric solutions, and their profitability.

Leadership, climate, psychological¬†capital,¬†commitment, and wellbeing in a non-profit organizationMcMurray, A. J., Pirola-Merlo, A., Sarros, J. C., & Islam, M. M. (2010). Leadership, climate, psychological capital, commitment, and wellbeing in a non-profit organization.¬†Leadership & Organization Development Journal,¬†31(5), 436-457. This exploratory study aims to examine the effects of leadership on organizational climate, employee psychological capital, commitment, and wellbeing in a religious/church‚Äźbased non‚Äźprofit organization. ‚ÄstLeadership effects are investigated using established scales including the transformational leadership scale, (TLS), organizational climate questionnaire (OCQ), positive and negative affect scale (PANAS), psychological capital (PsyCap), and organizational commitment. It is a context‚Äźbased study that considers a unique organizational culture that comprises social, political, economic, technological, personnel, and personal facets. The survey was administered across a large religious/church‚Äźbased non‚Äźprofit organization.

Does the Internet increase, decrease, or supplement social¬†capital? Social networks, participation, and community¬†commitmentWellman, B., Haase, A. Q., Witte, J., & Hampton, K. (2001). Does the Internet increase, decrease, or supplement social capital? Social networks, participation, and community commitment.¬†American behavioral scientist,¬†45(3), 436-455.¬†How does the Internet affect social capital? Do the communication possibilities of the Internet increase, decrease, or supplement interpersonal contact, participation, and community commitment? This evidence comes from a 1998 survey of 39,211 visitors to the National Geographic Society Web site, one of the first large-scale Web surveys. The authors find that people’s interaction online supplements their face-to-face and telephone communication without increasing or decreasing it. However, heavy Internet use is associated with increased participation in voluntary organizations and politics. Further support for this effect is the positive association between offline and online participation in voluntary organizations and politics. However, the effects of the Internet are not only positive: The heaviest users of the Internet are the least committed to online community. Taken together, this evidence suggests that the Internet is becoming normalized as it is incorporated into the routine practices of everyday life.

Capital commitment¬†and illiquidity in corporate bondsBessembinder, H., Jacobsen, S., Maxwell, W., & Venkataraman, K. (2018). Capital commitment and illiquidity in corporate bonds.¬†The Journal of Finance,¬†73(4), 1615-1661. We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased notably over time. However, dealer capital commitment, turnover, block trade frequency, and average trade size decreased during the financial crisis and thereafter. These declines are attributable to bank‚Äźaffiliated dealers, as nonbank dealers have increased their market commitment. Our evidence indicates that liquidity provision in the corporate bond markets is evolving away from the commitment of bank‚Äźaffiliated dealer capital to absorb customer imbalances, and that postcrisis banking regulations likely contribute.

Social capital and organizational commitmentWatson, G. W., & Papamarcos, S. D. (2002). Social capital and organizational commitment. Journal of business and psychology, 16(4), 537-552. Organizational scientists have been investigating the role of human relationships vis-à-vis firm productivity for some years. Recently, Social Capital has been theorized to play a central part in the reduction of organizational transaction costs. We briefly position Social Capital among several theories claiming a role for interpersonal capital, review its theoretical nuances, and test this theoretical structure using a sample of 469 sales professionals from a leading medical services firm. Our findings indicate that trust, communication, and employee focus have significant direct and moderate indirect affects on organizational commitment.

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