There has been considerable debate in recent years about alternative managerial performance
measures and their ability to align the interests of owners and managers. It appears that
the residual income measure, i.e., accounting income minus an interest charge on the capital
used by a division, has received particular attention in this debate. To implement residual
income as a performance measure, firms have to choose capital charge rates for individual
divisions as well as applicable accounting rules, e.g., schedules for depreciating the assets
acquired by a division. There seems to be general agreement that for internal performance
measurement firms should not view themselves as constrained by the accounting rules used
for external financial reporting.
This paper examines a multiperiod principal-agent model in which a divisional manager
has superior information regarding the profitability of an investment project available to his
division. In addition, the manager's effort is assumed to increase the periodic cash flows of
his division. We find that under certain conditions it is optimal for the principal to delegate
the investment decision to the manager and to base managerial compensation on residual
income. Our agency model speaks to the literature on alternative implementations of the
residual income performance measure by identifying depreciation rules and capital charge
rates that are consistent with optimal incentive contracting.
Dieser Datensatz wurde nicht während einer Tätigkeit an der Universität Mannheim veröffentlicht, dies ist eine Externe Publikation.
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