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Performance measurement for investment decisions under capital constraints

Author

Listed:
  • 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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    References listed on IDEAS

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    1. Stefan Reichelstein, 1997. "Investment Decisions and Managerial Performance Evaluation," Review of Accounting Studies, Springer, vol. 2(2), pages 157-180, June.
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    7. Tim Baldenius & Stefan Reichelstein, 2005. "Incentives for Efficient Inventory Management: The Role of Historical Cost," Management Science, INFORMS, vol. 51(7), pages 1032-1045, July.
    8. Sunil Dutta & Stefan Reichelstein, 2002. "Controlling Investment Decisions: Depreciation- and Capital Charges," Review of Accounting Studies, Springer, vol. 7(2), pages 253-281, June.
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    10. Sunil Dutta & Stefan Reichelstein, 2005. "Accrual Accounting for Performance Evaluation," Review of Accounting Studies, Springer, vol. 10(4), pages 527-552, December.
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    Cited by:

    1. Alexander Nezlobin & Stefan Reichelstein & Yanruo Wang, 2015. "Managerial performance evaluation for capacity investments," Review of Accounting Studies, Springer, vol. 20(1), pages 283-318, March.

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