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

Thomas Pfeiffer () and Georg Schneider ()
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Thomas Pfeiffer: Department of Business Studies, University of Vienna, Brünner Straße 72, A-1210 Vienna, Austria
Georg Schneider: Department of Business Studies, University of Vienna, Brünner Straße 72, A-1210 Vienna, Austria

Management Science, 2007, vol. 53, issue 3, 495-507

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.

Keywords: sequential capital budgeting; residual income; accounting adjustments; sequential adverse selection problem (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:53:y:2007:i:3:p:495-507

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