How Does Residual Income Affect Investment? The Role of Prior Performance Measures
Management Science, Vol. 52, No. 3, pp. 383-394, 2006
12 Pages Posted: 20 Oct 2011
Date Written: March 1, 2006
Abstract
This paper examines whether "you get what you pay for" in firms that implement residual income (RI)-based compensation. Specifically, this paper explores differences in investment patterns of firms that implement RI-based compensation plans conditional on whether the firms switched from earnings or return on investment (ROI)-based compensation. I find that the pattern of investment for firms switching to RI from earnings-based compensation is opposite to that of firms switching from ROI-based compensation. Changes in investment within each individual subgroup yield weaker, mixed results. In addition, this paper documents that delivered RI increases in firms that implement RI. My paper contributes to the literature on the investment effects of RI by examining the relevance of a set of arguments that have been made in management accounting textbooks since 1965. These arguments are still found in current textbooks and are commonly taught to students in graduate level managerial accounting classes. The arguments help us to examine a natural experiment in which we can better specify the conditions under which RI use is expected to be associated with changes in investment.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Providing Managerial Incentives: Cash Flows Versus Accrual Accounting
-
Accrual-Based Compensation, Depreciation and Investment Decisions
-
Controlling Investment Decisions: Depreciation- and Capital Charges
-
Revenue Recognition in a Multiperiod Agency Setting
By Sunil Dutta and Xiao-jun Zhang
-
Incentives for Efficient Inventory Management: The Role of Historical Cost
-
Leading Indicator Variables, Performance Measurement and Long-Term Versus Short-Term Contracts
-
Delegated Investment Decisions and Private Benefits of Control