The Asymptotic Optimality of Residual Income Maximization

The Asymptotic Optimality of Residual Income Maximization Residual income subtracts from operating income an interest charge for invested capital. Residual income can be calculated each period from current accounting information, unlike discounted cash flow (DCF), which requires the knowledge of future cash flows. This paper provides a normative justification for residual-income maximization by showing that if investment decisions are made myopically each period to maximize residual income, the resulting path asymptotically maximizes discounted cash flow. Thus, under the assumptions of the model, residual-income maximization is a heuristic that leads to the long-run DCF-optimum. Review of Accounting Studies Springer Journals

The Asymptotic Optimality of Residual Income Maximization

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Kluwer Academic Publishers
Copyright © 1998 by Kluwer Academic Publishers
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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