"How Does Residual Income Affect Investment? The Role of Prior Performance Measures"
©
Management Science,
March
2006
Volume: 52
|
Issue: 3
|
Pages: 383-94
Publication type: Journal article
Research Archive Topic: Accounting, Leadership, Operations
Abstract
This paper examines whether "you get what you pay for" in firms that implement residual income (RI)-based compensation. Specifically, this paper explores differences in investment patterns of firms that implement RI-based compensation plans conditional on whether the firms switched from earnings or return on investment (ROI)-based compensation. I find that the pattern of investment for firms switching to RI from earnings-based compensation is opposite to that of firms switching from ROI-based compensation. Changes in investment within each individual subgroup yield weaker, mixed results. In addition, this paper documents that delivered RI increases in firms that implement RI. My paper contributes to the literature on the investment effects of RI by examining the relevance of a set of arguments that have been made in management accounting textbooks since 1965. These arguments are still found in current textbooks and are commonly taught to students in graduate level managerial accounting classes. The arguments help us to examine a natural experiment in which we can better specify the conditions under which RI use is expected to be associated with changes in investment.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.
Robert Bloomfield
"A Pragmatic Approach to More Efficient Corporate Disclosure"
Accounting Horizons
(2012)
More
"Norms, Conformity, and Controls"
Journal of Accounting Research
(2011)
More
"Disagreement and the Cost of Capital"
Journal of Accounting Research
(2011)
More
Edwige Cheynel
"Analysts' sale and use of non-fundamental information"
Review of Accounting Studies
(2012)
More | Download PDF
Fabrizio Ferri
"Say on Pay Votes and CEO Compensation: Evidence from the UK"
Review of Finance
(2013)
More | Download PDF
"Reputation Penalties for Poor Monitoring of Executive Pay: Evidence from Option Backdating"
Journal of Financial Economics
(2012)
More | Download PDF
"Shareholder Activism and CEO Pay"
Review of Financial Studies
(2011)
More | Download PDF
Trevor Harris
"Discussion of 'The robustness of the Sarbanes Oxley effect on the U.S. capital market'"
Review of Accounting Studies
(2009)
More
"Enterprise Valuation Roundtable"
Journal of Applied Corporate Finance
(2007)
More
"FMA Roundtable on Stock Market Pricing and Value-Based Management"
Journal of Applied Corporate Finance
(2006)
More
Sharon Katz
"Does Public Ownership of Equity Improve Earnings Quality?"
The Accounting Review
(2010)
More
"Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors"
The Accounting Review
(2009)
More
Nahum Melumad
"Auditors' Liability, Investments and Capital Markets: An Unintended Consequence of Sarbanes-Oxley"
Journal of Accounting Research
(2012)
More
"Line-item Analysis of Earnings Quality"
Foundations and Trends in Accounting
(2008)
More | Download PDF
"Activity-Based Costing and Cost Interdependencies Among Products: The Denim Finishing Company"
Issues in Accounting Education
(2005)
More | View research
Doron Nissim
"Line-item Analysis of Earnings Quality"
Foundations and Trends in Accounting
(2008)
More | Download PDF
"Is Cash Flow King in Valuations?"
Financial Analysts Journal
(2007)
More | Download PDF
"Managerial Discretion and the Economic Determinants of the Disclosed Volatility Parameter for Valuing ESOs"
Review of Accounting Studies
(2007)
More | Download PDF
Stephen Penman
"Accounting for Revenues: A Framework for Standard Setting"
Accounting Horizons
(2011)
More
"Accounting for Risk and Return in Equity Valuation"
Journal of Applied Corporate Finance
(2011)
More
"Accounting for Value"
The European Financial Review
(2011)
More | View research
Gil Sadka
"Earnings Dispersion and Aggregate Stock Returns"
Journal of Accounting and Economics
(2012)
More
"Predictability and the Earnings-Returns Relation"
Journal of Financial Economics
(2009)
More | Download PDF
"Liquidity and the Post-Earnings-Announcement Drift"
Financial Analysts Journal
(2009)
More
Julian Yeo
"The Use of Comparable Firm Approach in Valuing Australian IPOs"
International Review of Financial Analysis
(2007)
More
"The Impact of Forecast Disclosure and Its Accuracy on Equity Pricing: The IPO Perspective"
Journal of Accounting, Auditing and Finance
(2001)
More
"The Pricing of Underwriting Services in the Australian Capital Market"
Pacific-Basin Finance Journal
(2000)
More
Amir Ziv
"Intertemporal Dynamics of Corporate Voluntary Disclosures"
Journal of Accounting Research
(2008)
More | View research
"Unbalanced Information and the Interaction between Information Acquisition, Operating Activities and Voluntary Disclosure"
The Accounting Review
(2007)
More
"Activity-Based Costing and Cost Interdependencies Among Products: The Denim Finishing Company"
Issues in Accounting Education
(2005)
More | View research