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Residual Income-Based Compensation Plans for Controlling Investment Decisions Under Sequential Private Information

Residual Income-Based Compensation Plans for Controlling Investment Decisions Under Sequential... Earlier literature has pointed to the effectiveness of residual income-type measures based on particular accrual accounting rules such as the relative benefit allocation rule. These performance metrics have been shown to generate desirable managerial incentives when investment decisions are delegated. This paper further attests to the robustness of these measures by extending the result to a sequential adverse selection model with an inherent real option (an option to abandon). In other words, as long as the residual income measures are judiciously constructed, neither private information nor the requirement to selectively exercise an option derails their use in this setting. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Science INFORMS

Residual Income-Based Compensation Plans for Controlling Investment Decisions Under Sequential Private Information

Management Science , Volume 53 (3): 13 – Mar 8, 2007
13 pages

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References (24)

Publisher
INFORMS
Copyright
Copyright © INFORMS
Subject
Research Article
ISSN
0025-1909
eISSN
1526-5501
DOI
10.1287/mnsc.1060.0631
Publisher site
See Article on Publisher Site

Abstract

Earlier literature has pointed to the effectiveness of residual income-type measures based on particular accrual accounting rules such as the relative benefit allocation rule. These performance metrics have been shown to generate desirable managerial incentives when investment decisions are delegated. This paper further attests to the robustness of these measures by extending the result to a sequential adverse selection model with an inherent real option (an option to abandon). In other words, as long as the residual income measures are judiciously constructed, neither private information nor the requirement to selectively exercise an option derails their use in this setting.

Journal

Management ScienceINFORMS

Published: Mar 8, 2007

Keywords: Keywords : sequential capital budgeting ; residual income ; accounting adjustments ; sequential adverse selection problem

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