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The Asymptotic Optimality of Residual Income Maximization

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  • Regina M. Anctil

    (University of California)

  • James S. Jordan

    (University of California)

  • Arijit Mukherji

    (University of California)

Abstract

Residual income subtracts from operating income an interest charge for invested capital. Residual income can be calculated each period from current accounting information, unlike discounted cash flow (DCF), which requires the knowledge of future cash flows. This paper provides a normative justification for residual-income maximization by showing that if investment decisions are made myopically each period to maximize residual income, the resulting path asymptotically maximizes discounted cash flow. Thus, under the assumptions of the model, residual-income maximization is a heuristic that leads to the long-run DCF-optimum.

Suggested Citation

  • Regina M. Anctil & James S. Jordan & Arijit Mukherji, 1998. "The Asymptotic Optimality of Residual Income Maximization," Review of Accounting Studies, Springer, vol. 2(3), pages 207-229, September.
    • Handle: RePEc:spr:reaccs:v:2:y:1998:i:3:d:10.1023_a:1023636720728
    DOI: 10.1023/A:1023636720728
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    References listed on IDEAS

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    1. Rogerson, William P, 1997. "Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 770-795, August.
    2. James S Jordan, 1999. "Management Accounting in Activity Networks," CRIEFF Discussion Papers 9912, Centre for Research into Industry, Enterprise, Finance and the Firm.
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