The Asymptotic Optimality of Residual Income Maximization

Regina M. Anctil, James S. Jordan and Arijit Mukherji
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Regina M. Anctil: University of California
James S. Jordan: University of California
Arijit Mukherji: University of California

Review of Accounting Studies, 1998, vol. 2, issue 3, No 1, 207-229

Abstract: Abstract 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.

Keywords: Cash Flow; Public Finance; Current Accounting; Investment Decision; Accounting Information (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1023/A:1023636720728

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