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Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure

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Author Info
Rogerson, William P
Abstract

This paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures. The main result is that there exists a unique allocation rule that always induces the manager to choose the efficient investment level. The income measure created by this allocation rule is usually referred to as residual income or economic value added. Copyright 1997 by the University of Chicago.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 105 (1997)
Issue (Month): 4 (August)
Pages: 770-95
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Handle: RePEc:ucp:jpolec:v:105:y:1997:i:4:p:770-95

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  2. Carlo Alberto, Magni, 2008. "Splitting Up Value: A Critical Review of Residual Income Theories," MPRA Paper 10506, University Library of Munich, Germany. [Downloadable!]
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  3. Randolph Sloof & Mirjam van Praag, 2008. "The Degradation of Distorted Performance Measures," Tinbergen Institute Discussion Papers 08-072/3, Tinbergen Institute. [Downloadable!]
  4. Louis John Velthuis, 2004. "Value Based Management auf Basis von ERIC," Working Paper Series: Finance and Accounting 127, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
  5. Tracey West & Andrew Worthington, 1999. "The information content of economic value-added: A comparative analysis with earnings, cash flow and residual income," School of Economics and Finance Discussion Papers and Working Papers Series 066, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
  6. Ghiselli Ricci, Roberto & Magni, Carlo Alberto, 2009. "Axiomatization of residual income and generation of financial securities," MPRA Paper 14438, University Library of Munich, Germany. [Downloadable!]
  7. Thomas Pfeiffer & Louis Velthuis, 2005. "On the optimality of linear contracts to induce goal-congruent investment behaviour," Applied Economics Letters, Taylor and Francis Journals, vol. 12(4), pages 207-211, March. [Downloadable!] (restricted)
  8. Frederick Guy, 2000. "CEO Pay, Shareholder Returns, and Accounting Profits," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 7(3), pages 263-274, November. [Downloadable!] (restricted)
  9. Stoughton, Neal & Zechner, Josef, 2004. "Optimal Capital Allocation Using RAROC(tm) and EVA," CEPR Discussion Papers 4169, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Andrew Worthington & Tracey West, 2000. "A Review and Synthesis of the Economic Value-Added Literature," School of Economics and Finance Discussion Papers and Working Papers Series 075, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
  11. Bouwens, Jan & Lent, Laurens van, 2006. "Assessing the performance of business unit managers," Discussion Paper 92, Tilburg University, Center for Economic Research. [Downloadable!]
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  12. Jennifer Kunz, 2008. "Do we measure what we get?," Working Paper Series: Finance and Accounting 188, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
  13. Stoughton, Neal & Zechner, Josef, 1999. "Optimal Capital Allocation Using RAROC And EVA," CEPR Discussion Papers 2344, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  14. Chongwoo Choe, 2001. "Optimal Executive Compensation: Some Equivalence Results," Discussion Paper Series a419, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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