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Performance measurement for investment decisions under capital constraints

Author

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  • Alwine Mohnen

    (University of Cologne)

  • Moshe Bareket

    (Duke University)

Abstract

An owner delegates investment decisions to a better informed manager whose time preferences are unknown to the owner. Due to exogenous capital constraints, not all profitable projects can be undertaken, and therefore the owner wants the manager to select the NPV-maximizing set of projects. We show that the relative benefit cost allocation scheme proposed by prior literature does not solve this problem. Adopting the same information structure as in Rogerson (J Polit Econ 105, 770–795, 1997) and Reichelstein (Rev Account Stud 2, 157–180, 1997), we demonstrate how to obtain robust goal congruence using residual income. The resulting revenue recognition and cost allocation rules lead to a performance measure reflecting the expected NPV-ranking of projects in each and every period.

Suggested Citation

  • Alwine Mohnen & Moshe Bareket, 2007. "Performance measurement for investment decisions under capital constraints," Review of Accounting Studies, Springer, vol. 12(1), pages 1-22, March.
    • Handle: RePEc:spr:reaccs:v:12:y:2007:i:1:d:10.1007_s11142-006-9020-1
    DOI: 10.1007/s11142-006-9020-1
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