Residual income and value creation: An investigation into the lost-capital paradigm
AbstractThis paper presents a new way of measuring residual income, originally introduced by Magni (2000a,b,c, 2001a,b, 2003). Contrary to the standard residual income, the capital charge is equal to the capital lost by investors multiplied by the cost of capital. The lost capital may be viewed as (a) the foregone capital, (b) the capital implicitly infused into the business, (c) the outstanding capital of a shadow project, (d) the claimholders' credit. Relations of the lost capital with book values and market values are studied, as well as relations of the lost capital residual income with the classical standard paradigm; many appealing properties are derived, among which an aggregation property. Different concepts and results, provided by different authors in such different fields as economic theory, management accounting and corporate finance, are considered: O'Hanlon and Peasnell's (2002) unrecovered capital and Excess Value Created; Ohlson's (2005) Abnormal Earnings Growth; O'Byrne's (1997) EVA improvement; Miller and Modigliani's (1961) investment opportunities approach to valuation; Young and O'Byrne's (2001) Adjusted EVA; Keynes's (1936) user cost; Drukarczyk and Schueler's (2000) Net Economic Income; Fernández's (2002) Created Shareholder Value; Anthony's (1975) profit. They are all conveniently reinterpreted within the theoretical domain of the lost-capital paradigm and conjoined in a unified view. The results found make this new theoretical approach a good candidate for firm valuation, capital budgeting decision-making, managerial incentives and control.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal European Journal of Operational Research.
Volume (Year): 201 (2010)
Issue (Month): 2 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/eor
Accounting Corporate finance Residual income Value creation Management Incentive compensation Lost-capital Net Present Value Book value Market value;
Other versions of this item:
- Magni, Carlo Alberto, 2007. "Residual income and value creation: An investigation into the lost-capital paradigm," MPRA Paper 6783, University Library of Munich, Germany.
- Magni, Carlo Alberto, 2007. "Residual income and value creation: An investigation into the lost-capital paradigm," MPRA Paper 7335, University Library of Munich, Germany.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
- D - Microeconomics
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Magni, Carlo Alberto, 2000. "Systemic Value Added, Residual Income and Decomposition of a Cash Flow Stream," MPRA Paper 5900, University Library of Munich, Germany.
- Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
- Magni, Carlo Alberto, 2003.
"Opportunity cost, excess profit, and counterfactual conditionals,"
5695, University Library of Munich, Germany.
- Carlo Alberto Magni, 2009. "Opportunity Cost, Excess Profit, and Counterfactual Conditionals," Frontiers in Finance and Economics, SKEMA Business School, vol. 6(1), pages 118-154, April.
- Roberto Ghiselli Ricci & Carlo Alberto Magni, 2006.
"Economic value added and systemic value added: symmetry, additive coherence and differences in performance,"
Applied Financial Economics Letters,
Taylor and Francis Journals, vol. 2(3), pages 151-154, May.
- Roberto Ghiselli Ricci & Carlo Alberto Magni, 2009. "Economic value added and systemic value added: symmetry, aditive coherence and differences in performance," PROYECCIONES FINANCIERAS Y VALORACION 005736, MASTER CONSULTORES.
- Carlo Magni, 2005. "On Decomposing Net Final Values: Eva, Sva and Shadow Project," Theory and Decision, Springer, vol. 59(1), pages 51-95, 08.
- Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "Mathematical Analysis of Rates of Return Under Certainty," Management Science, INFORMS, vol. 11(3), pages 395-403, January.
- Magni, Carlo Alberto, 2005. "On decomposing net final values: EVA, SVA, and shadow project," MPRA Paper 12357, University Library of Munich, Germany.
- Magni, Carlo Alberto, 2007. "Relevance or irrelevance of retention for dividend policy irrelevance," MPRA Paper 5591, University Library of Munich, Germany.
- Diran Bodenhorn, 1959. "On The Problem Of Capital Budgeting," Journal of Finance, American Finance Association, vol. 14(4), pages 473-492, December.
- DeAngelo, Harry & DeAngelo, Linda, 2006. "The irrelevance of the MM dividend irrelevance theorem," Journal of Financial Economics, Elsevier, vol. 79(2), pages 293-315, February.
- Weaver, Samuel C. & Weston, J. Fred, 2003. "A Unifying Theory of Value Based Management," University of California at Los Angeles, Anderson Graduate School of Management qt0xw5m9mz, Anderson Graduate School of Management, UCLA.
- Stephen F. O'Byrne & S. David Young, 2006. "Incentives and Investor Expectations," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(2), pages 98-105.
- Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
- magni, Carlo Alberto, 2006.
"Zelig and the Art of Measuring Excess Profit,"
5663, University Library of Munich, Germany.
- Carlo Alberto Magni, 2003. "Decomposition of Net Final Values: Systemic Value Added and Residual Income," Bulletin of Economic Research, Wiley Blackwell, vol. 55(2), pages 149-176, 04.
- Carlo Alberto Magni, 2009.
"Modeling excess profit,"
PROYECCIONES FINANCIERAS Y VALORACION
005522, MASTER CONSULTORES.
- Magni, Carlo Alberto, 2000. "Decomposition of a Certain Cash Flow Stream: Differential Systemic Value and Net Final Value," MPRA Paper 7308, University Library of Munich, Germany.
- Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "An Analysis of Criteria for Investment and Financing Decisions Under Certainty," Management Science, INFORMS, vol. 12(3), pages 151-179, November.
- P. H. Karmel, 1959. "The Marginal Efficiency Of Capital," The Economic Record, The Economic Society of Australia, vol. 35(72), pages 429-434, December.
- James E. Walter, 1956. "Dividend Policies And Common Stock Prices," Journal of Finance, American Finance Association, vol. 11(1), pages 29-41, 03.
- Carlo Alberto, Magni, 2008.
"Splitting Up Value: A Critical Review of Residual Income Theories,"
10506, University Library of Munich, Germany.
- Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, vol. 198(1), pages 1-22, October.
- Ghiselli Ricci, Roberto & Magni, Carlo Alberto, 2009. "Axiomatization of residual income and generation of financial securities," MPRA Paper 14438, University Library of Munich, Germany.
- Hechmi Soumaya, 2013. "Eva versus Other Performance Measures," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(4), pages 532-541, April.
- Hamed Ahmadinia & Javad Afrasiabishani & Elham Hesami, 2012. "A Comprehensive Review on Capital Structure Theories," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 15(45), pages 3-26, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.