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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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    References listed on IDEAS

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    1. Beaver, Wh & Dukes, Re, 1974. "Delta-Depreciation Methods - Some Analytical Results," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 12(2), pages 205-215.
    2. Feltham, GA & Ohlson, JA, 1996. "Uncertainty resolution and the theory of depreciation measurement," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 34(2), pages 209-234.
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    Cited by:

    1. Madhav V. Rajan & Stefan Reichelstein & Mark T. Soliman, 2007. "Conservatism, growth, and return on investment," Review of Accounting Studies, Springer, vol. 12(2), pages 325-370, September.
    2. Sudhakar Balachandran & Partha Mohanram, 2012. "Using residual income to refine the relationship between earnings growth and stock returns," Review of Accounting Studies, Springer, vol. 17(1), pages 134-165, March.
    3. Madhav V. Rajan, 2003. "Discussion of “Performance Evaluation and Corporate Income Taxes in a Sequential Delegation Setting”," Review of Accounting Studies, Springer, vol. 8(2), pages 311-319, June.
    4. Carlos Corona, 2009. "Dynamic performance measurement with intangible assets," Review of Accounting Studies, Springer, vol. 14(2), pages 314-348, September.
    5. 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.
    6. Sunil Dutta & Stefan Reichelstein, 1999. "Asset Valuation and Performance Measurement in a Dynamic Agency Setting," Review of Accounting Studies, Springer, vol. 4(3), pages 235-258, December.
    7. Tim Baldenius & Amir Ziv, 2003. "Performance Evaluation and Corporate Income Taxes in a Sequential Delegation Setting," Review of Accounting Studies, Springer, vol. 8(2), pages 283-309, June.
    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.
    9. Young K. Kwon & D. Paul Newman & Yoon S. Suh, 2001. "The Demand for Accounting Conservatism for Management Control," Review of Accounting Studies, Springer, vol. 6(1), pages 29-52, March.
    10. Maureen McNichols & Madhav V. Rajan & Stefan Reichelstein, 2014. "Conservatism correction for the market-to-book ratio and Tobin’s q," Review of Accounting Studies, Springer, vol. 19(4), pages 1393-1435, December.
    11. 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.
    12. Jonathan Glover, 2002. "Discussion of: “Controlling Investment Decisions: Depreciation and Capital Charges”," Review of Accounting Studies, Springer, vol. 7(2), pages 283-287, June.

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