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Investment Decisions and Managerial Performance Evaluation

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  • Stefan Reichelstein

    (University of California at Berkeley)

Abstract

This paper considers incentive provisions for a manager who makes investment decisions. The manager's performance measure can be based on current accounting information: cash flow, depreciation, book value, and current investment. We argue that Residual Income is the unique (linear) performance measure that achieves goal congruence, i.e., the manager accepts all positive NPV projects, and only those. If the manager has the same discount rate as the owner, the depreciation rules remain indeterminate. However, if the manager's discount rate assumes potentially a whole range of values, then a particular depreciation policy combined with Residual Income is the unique way to achieve goal congruence.

Suggested Citation

  • Stefan Reichelstein, 1997. "Investment Decisions and Managerial Performance Evaluation," Review of Accounting Studies, Springer, vol. 2(2), pages 157-180, June.
    • Handle: RePEc:spr:reaccs:v:2:y:1997:i:2:d:10.1023_a:1018376808228
    DOI: 10.1023/A:1018376808228
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