Review of Accounting Studies

, Volume 12, Issue 1, pp 1–22 | Cite as

Performance measurement for investment decisions under capital constraints

Article

Abstract

An owner delegates investment decisions to a better informed manager whose time preferences are unknown to the owner. Due to exogenous capital constraints, not all profitable projects can be undertaken, and therefore the owner wants the manager to select the NPV-maximizing set of projects. We show that the relative benefit cost allocation scheme proposed by prior literature does not solve this problem. Adopting the same information structure as in Rogerson (J Polit Econ 105, 770–795, 1997) and Reichelstein (Rev Account Stud 2, 157–180, 1997), we demonstrate how to obtain robust goal congruence using residual income. The resulting revenue recognition and cost allocation rules lead to a performance measure reflecting the expected NPV-ranking of projects in each and every period.

Keywords

Accrual accounting Capital budgeting EVA NPV maximization Performance measurement Revenue recognition Residual income 

JEL Classifications

M40 M41 G31 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of Business Administration and Personnel EconomicsUniversity of CologneCologneGermany
  2. 2.Fuqua School of BusinessDuke UniversityDurhamUSA

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