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Residual Income-Based Compensation Plans for Controlling Investment Decisions Under Sequential Private Information

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  • Thomas Pfeiffer

    () (Department of Business Studies, University of Vienna, Brünner Straße 72, A-1210 Vienna, Austria)

  • Georg Schneider

    () (Department of Business Studies, University of Vienna, Brünner Straße 72, A-1210 Vienna, Austria)

Abstract

Earlier literature has pointed to the effectiveness of residual income-type measures based on particular accrual accounting rules such as the relative benefit allocation rule. These performance metrics have been shown to generate desirable managerial incentives when investment decisions are delegated. This paper further attests to the robustness of these measures by extending the result to a sequential adverse selection model with an inherent real option (an option to abandon). In other words, as long as the residual income measures are judiciously constructed, neither private information nor the requirement to selectively exercise an option derails their use in this setting.

Suggested Citation

  • Thomas Pfeiffer & Georg Schneider, 2007. "Residual Income-Based Compensation Plans for Controlling Investment Decisions Under Sequential Private Information," Management Science, INFORMS, vol. 53(3), pages 495-507, March.
  • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:3:p:495-507
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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0631
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. repec:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9402-6 is not listed on IDEAS
    3. Björn Häckel, 2010. "Risikoadjustierte Wertbeiträge zur ex ante Entscheidungsunterstützung: Ein axiomatischer Ansatz," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 21(1), pages 81-108, June.
    4. repec:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9405-3 is not listed on IDEAS
    5. 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.
    6. Carlo Alberto Magni, 2009. "Accounting and economic measures:An integrated theory of capital budgeting," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0019, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    7. Alexander Nezlobin & Madhav V. Rajan & Stefan Reichelstein, 2012. "Dynamics of Rate-of-Return Regulation," Management Science, INFORMS, vol. 58(5), pages 980-995, May.
    8. Carlo Alberto Magni, 2010. "Average Internal Rate of Return and investment decisions: A new perspective," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0021, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    9. Anna Boisits & Roland Königsgruber, 2016. "Information acquisition and disclosure by firms in the presence of additional available information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 24(1), pages 177-205, March.
    10. Christian Lohmann, 2015. "Managerial incentives for capacity investment decisions," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(1), pages 27-49, April.
    11. repec:eee:ejores:v:270:y:2018:i:1:p:1-24 is not listed on IDEAS
    12. Anna Boisits & Roland Königsgruber, 2016. "Information acquisition and disclosure by firms in the presence of additional available information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 24(1), pages 177-205, March.
    13. Löffler, Clemens & Pfeiffer, Thomas & Schneider, Georg, 2012. "Controlling for supplier switching in the presence of real options and asymmetric information," European Journal of Operational Research, Elsevier, vol. 223(3), pages 690-700.
    14. Clemens Löffler & Thomas Pfeiffer & Georg Schneider, 2013. "The irreversibility effect and agency conflicts," Theory and Decision, Springer, vol. 74(2), pages 219-239, February.
    15. Wolfgang Schultze & Andreas Weiler, 2010. "Goodwill accounting and performance measurement," Managerial Finance, Emerald Group Publishing, vol. 36(9), pages 768-784, August.
    16. Pfeiffer, Thomas, 2010. "A dynamic model of supplier switching," European Journal of Operational Research, Elsevier, vol. 207(2), pages 697-710, December.

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