Residual Income as a Performance Measure for Switching Options


Investment Decision Real Option Switching Option Initial Investment Strike Price 
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  1. 1.
    See Margrabe (1978) and Carr (1988) for the valuation of the option to switch in a single-person decision context.Google Scholar
  2. 3.
    See Pellens, et al. (1998).Google Scholar
  3. 4.
    See, e.g., Ehrbar (1998); Stern et al. (2001); Young & O’Byrne (2001).Google Scholar
  4. 5.
    See particularly Rogerson (1997); Reichelstein (1997). See also Baldenius (2002); Dutta & Reichelstein (1999); Dutta & Reichelstein (2002b); Dutta & Reichelstein (2002a); Pfeiffer (2000); Reichelstein (2000); Wagenhofer (2003).Google Scholar
  5. 6.
    See, e.g., Young & O’Byrne (2001), pp. 147–158.Google Scholar
  6. 8.
    See Rogerson (1997); Reichelstein (1997); Dutta & Reichelstein (2002a).Google Scholar
  7. 10.
    For example, Antle et al. (2000) and chapter 3 analyze agency models, where the manager has private information about an investment with an embedded real option. However, they analyze capital budgeting issues and do not consider residual income as a performance measure. Dutta & Reichelstein (2002a) analyze residual income as a performance measure for research and development investments, when the project can be abandoned before it generates cash inflows. Dutta (2003) analyzes residual income as a managerial performance measure, when the manager can invest in a growth opportunity that can also be implemented outside the firm.Google Scholar
  8. 14.
    For the first decision, this result follows immediately from proposition 3 in Reichelstein (1997), p. 168. The second decision can be considered as a mutually exclusive investment opportunity, and a derivation of a corresponding result is straightforward for our assumption of identically distributed cash flows.Google Scholar
  9. 15.
    See Rogerson (1997).Google Scholar
  10. 16.
    This result is the well-known Preinreich-Luecke-Theorem, see Preinreich (1937) and Lücke (1955).Google Scholar
  11. 19.
    See Corona (2002) for a detailed analysis of a goal congruent treatment of goodwill in business acquisitions, when residual income is used for managerial performance evaluation.Google Scholar
  12. 20.
    See, e.g., Friedl (2000).Google Scholar

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© Springer-Verlag Berlin Heidelberg 2007

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