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Review of Accounting Studies

, Volume 1, Issue 1, pp 9–34 | Cite as

Capital budgeting using residual income maximization

  • Regina M. Anctil
Article

Abstract

This analysis provides theoretical support for the use of residual income. Economic theory states that capital investment should maximize the present value of incremental cash flow. When a firm is decentralized, coordinating the necessary information to determine optimal investment in the short run may be impossible. But the residual income maximizing choice can be coordinated using a simple transfer-pricing system. Under appropriate capitalization and depreciation policies, the residual-income maximization policy leads the firm to make suboptimal short-run investment decisions, yet these decisions still lead the firm to its long-run, presentvalue-maximizing capacity level.

Keywords

Economic Theory Cash Flow Theory State Capital Investment Investment Decision 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Kluwer Academic Publishers 1996

Authors and Affiliations

  • Regina M. Anctil
    • 1
  1. 1.Haas School of BusinessUniversity of CaliforniaBerkeley

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