Residual income and value creation: An investigation into the lost-capital paradigm

Carlo Alberto Magni

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents a new way of measuring residual income, originally introduced by Magni (2000a, 2000b, 2003). Contrary to the standard residual income, the capital charge is equal to the capital lost by investors. The lost capital may be viewed as (a) the foregone capital, (b) the capital implicitly infused into the business, (c) the outstanding capital of a shadow project, (d) the claimholders' credit. Relations of the lost capital with book values and market values are studied, as well as relations of the lost-capital residual income with the classical standard paradigm; many appealing properties are derived, among which a property of earnings aggregation. Different concepts and results, provided by different authors in such different fields as economic theory, management accounting and corporate finance, are considered: O'Hanlon and Peasnell's (2002) unrecovered capital and Excess Value Created; Ohlson's (2005) Abnormal Earnings Growth; O'Byrne's (1997) EVA improvement; Miller and Modigliani's (1961) investment opportunities approach to valuation; Keynes's (1936) user cost; Drukarczyk and Schueler's (2000) Net Economic Income, Fernandez's (2002) Created Shareholder Value, Anthony's (1975) profit. They are all conveniently reinterpreted within the theoretical domain of the lost-capital paradigm and conjoined in a unified view. The results found make this new theoretical approach a good candidate for firm valuation, incentive compensation, capital budgeting decision-making

Keywords: Corporate finance; management accounting; firm valuation; residual income; value creation; incentive compensation; outstanding capital; lost capital; net present value; book value; market value (search for similar items in EconPapers)
JEL-codes: D40 D46 G0 G11 G12 G30 G31 M21 M40 M41 M52 (search for similar items in EconPapers)
Date: 2007-11-13
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://mpra.ub.uni-muenchen.de/6783/1/MPRA_paper_6783.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/9742/1/MPRA_paper_9742.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/14570/1/MPRA_paper_14570.pdf revised version (application/pdf)

Related works:
Journal Article: Residual income and value creation: An investigation into the lost-capital paradigm (2010)
Working Paper: Residual income and value creation: An investigation into the lost-capital paradigm (2007)
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