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Managerial performance evaluation for capacity investments

Author

Listed:
  • Alexander Nezlobin

    (University of California)

  • Stefan Reichelstein

    (Stanford University)

  • Yanruo Wang

    (Incapture Investments)

Abstract

This paper examines the design of managerial performance measures based on accounting information. The owners of the firm seek to create goal congruence for a better informed manager who is to decide on capacity investments and subsequent production levels. Managerial incentives are shaped by the performance metric and the depreciation schedule for capacity assets. Earlier literature has made the distinction between capacity assets whose degradation is primarily usage-driven as opposed to time-driven. Our analysis also distinguishes between two plausible scenarios in which an inherent lumpiness in the efficient scale of investments necessitates one upfront investment as opposed to a sequence of incremental capacity additions over time. For each of the four resulting scenarios, we obtain a complete characterization of the entire class of goal congruent performance metrics and depreciation schedules. The final part of our analysis also explores goal congruence in settings where the decline of asset productivity is a function of both time and usage.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:1:d:10.1007_s11142-014-9303-x
    DOI: 10.1007/s11142-014-9303-x
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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