Investment Decisions and Managerial Performance Evaluation

Posted: 13 Aug 1997

See all articles by Stefan J. Reichelstein

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

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.

JEL Classification: M40, M46, G31, J33

Suggested Citation

Reichelstein, Stefan J., Investment Decisions and Managerial Performance Evaluation. REVIEW OF ACCOUNTING STUDIES, Vol 2, No 2, 1997. Available at SSRN: https://ssrn.com/abstract=10617

Stefan J. Reichelstein (Contact Author)

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1129 (Phone)
650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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