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, 2000b, 2003). Contrary to the standard residual income, the capital charge is equal to the capital lost by investors. 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 a property of earnings aggregation. 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; Keynes's (1936) user cost; Drukarczyk and Schueler's (2000) Net Economic Income, Fernandez'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, incentive compensation, capital budgeting decision-making
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6783.
Date of creation: 13 Nov 2007
Date of revision:
Corporate finance; management accounting; firm valuation; residual income; value creation; incentive compensation; outstanding capital; lost capital; net present value; book value; market value;
Other versions of this item:
- Magni, Carlo Alberto, 2010. "Residual income and value creation: An investigation into the lost-capital paradigm," European Journal of Operational Research, Elsevier, vol. 201(2), pages 505-519, March.
- 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
- D46 - Microeconomics - - Market Structure and Pricing - - - Value Theory
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G0 - Financial Economics - - General
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
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.:
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Frontiers in Finance and Economics,
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"Splitting Up Value: A Critical Review of Residual Income Theories,"
10506, University Library of Munich, Germany.
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