Performance measurement for investment decisions under capital constraints |
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| Authors: | Alwine Mohnen Moshe Bareket |
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| Institution: | (1) Department of Business Administration and Personnel Economics, University of Cologne, Herbert-Lewin-Strasse 2, 50931 Cologne, Germany;(2) Fuqua School of Business, Duke University, Durham, USA |
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| Abstract: | An owner delegates investment decisions to a better informed manager whose time preferences are unknown to the owner. Due
to exogenous capital constraints, not all profitable projects can be undertaken, and therefore the owner wants the manager
to select the NPV-maximizing set of projects. We show that the relative benefit cost allocation scheme proposed by prior literature
does not solve this problem. Adopting the same information structure as in Rogerson (J Polit Econ 105, 770–795, 1997) and
Reichelstein (Rev Account Stud 2, 157–180, 1997), we demonstrate how to obtain robust goal congruence using residual income.
The resulting revenue recognition and cost allocation rules lead to a performance measure reflecting the expected NPV-ranking
of projects in each and every period.
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| Keywords: | Accrual accounting Capital budgeting EVA NPV maximization Performance measurement Revenue recognition Residual income |
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