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Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure

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  • Rogerson, William P

Abstract

This paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures. The main result is that there exists a unique allocation rule that always induces the manager to choose the efficient investment level. The income measure created by this allocation rule is usually referred to as residual income or economic value added. Copyright 1997 by the University of Chicago.

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  • 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.
  • Handle: RePEc:ucp:jpolec:v:105:y:1997:i:4:p:770-95
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    References listed on IDEAS

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    1. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    2. Timothy J. Sheehan, 1994. "TO EVA-super-TM OR NOT TO EVA: IS THAT THE QUESTION?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(2), pages 85-87.
    3. Kim, Oliver & Suh, Yoon, 1993. "Incentive efficiency of compensation based on accounting and market performance," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 25-53, April.
    4. repec:mes:challe:v:30:y:1987:i:4:p:55-56 is not listed on IDEAS
    5. Bushman, Robert M. & Indjejikian, Raffi J., 1993. "Accounting income, stock price, and managerial compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 3-23, April.
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