Managerial performance evaluation for capacity investments

Alexander Nezlobin (), Stefan Reichelstein () and Yanruo Wang ()
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Alexander Nezlobin: University of California
Stefan Reichelstein: Stanford University
Yanruo Wang: Incapture Investments

Review of Accounting Studies, 2015, vol. 20, issue 1, No 9, 283-318

Abstract: Abstract This paper examines the design of managerial performance measures based on accounting information. The owners of the firm seek to create goal congruence for a better informed manager who is to decide on capacity investments and subsequent production levels. Managerial incentives are shaped by the performance metric and the depreciation schedule for capacity assets. Earlier literature has made the distinction between capacity assets whose degradation is primarily usage-driven as opposed to time-driven. Our analysis also distinguishes between two plausible scenarios in which an inherent lumpiness in the efficient scale of investments necessitates one upfront investment as opposed to a sequence of incremental capacity additions over time. For each of the four resulting scenarios, we obtain a complete characterization of the entire class of goal congruent performance metrics and depreciation schedules. The final part of our analysis also explores goal congruence in settings where the decline of asset productivity is a function of both time and usage.

Keywords: Performance measurement; Managerial incentives; Accrual accounting (search for similar items in EconPapers)
JEL-codes: D82 M40 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-014-9303-x

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