Residual Income and Value-Creation: The Missing Link

Residual Income and Value-Creation: The Missing Link This paper extends the residual income literature to provide a framework for the use of residual income in performance measurement, applicable in value-based management. It shows that, under a simple initializing assumption, an accounting-free measure of ‘excess value created’ over a multi-period interval can be written entirely in terms of (i) within-interval realized residual incomes and (ii) end-of-interval expected future residual incomes, both appropriately adjusted for the time value of money. It also shows that, when the simple initializing assumption is relaxed, excess value created can be expressed in terms of ‘excess residual incomes,’ measured by comparison with expectations as at the beginning of the multiperiod interval. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Residual Income and Value-Creation: The Missing Link

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Publisher
Springer Journals
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1020230203952
Publisher site
See Article on Publisher Site

Abstract

This paper extends the residual income literature to provide a framework for the use of residual income in performance measurement, applicable in value-based management. It shows that, under a simple initializing assumption, an accounting-free measure of ‘excess value created’ over a multi-period interval can be written entirely in terms of (i) within-interval realized residual incomes and (ii) end-of-interval expected future residual incomes, both appropriately adjusted for the time value of money. It also shows that, when the simple initializing assumption is relaxed, excess value created can be expressed in terms of ‘excess residual incomes,’ measured by comparison with expectations as at the beginning of the multiperiod interval.

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 21, 2004

References

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