Review of Accounting Studies, 7, 283–287, 2002 C 2002 Kluwer Academic Publishers. Manufactured in The Netherlands. Discussion of: “Controlling Investment Decisions: Depreciation and Capital Charges” JONATHAN GLOVER Carnegie Mellon University, Graduate School of Industrial Administration, Pittsburgh, PA 15213-3890 1. Introduction Residual income based performance evaluation has received a great deal of attention in both the popular press and in academic research. To the best of my knowledge, Dutta and Reichelstein (2002) is the ﬁrst principal-agent model to provide a rationalization for the use of residual income in which the conﬂict of interest between the principal and agent over project selection arises endogenously. 2. Example Suppose an owner has an investment opportunity that requires a cash outﬂow of 109 today and will produce equal cash inﬂows at the end of the next two years. The annual cash inﬂow is equally likely to be 72 or 108 per year. The owner’s discount rate is 20%. Either type of project has a positive NPV and, hence, should be accepted: −109 + 72/(1.2) + 2 2 72/(1.2) = 1 and −109 + 108/(1.2) + 108/(1.2) = 56. Now, suppose the decision rights for project acceptance resign with an (investment center) manager. There is
Review of Accounting Studies – Springer Journals
Published: Oct 21, 2004
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