Articlegreen2003

Accrual-based compensation, depreciation and investment decisions

90 citations0/0 files storedEuropean Accounting Review

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Accounting and Organizational Management Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting

Abstract

The paper studies incentive effects of accruals used for performance measurement in short-term contracts, if an agent undertakes activities with long-term and short-term consequences. The paper characterizes the optimal depreciation method and shows that it is not consistent with the traditional matching principle. Rather, it aligns the performance measure more with the expected long-term consequences of the investment, and shifts risk away from the agent. The paper also identifies conditions under which it is preferable to let the agent select the depreciation versus using cash flows for performance measurement.

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References

1992Incentive Contracts and Performance Measurement 1994Performance Measure Congruity and Diversity in Multi-Task Principal/Agent Relations.1990Short-term contracts and long-term agency relationships 1996Uncertainty Resolution and the Theory of Depreciation Measurement 2001Balancing Performance Measures 1997Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure 1993Accounting income, stock price, and managerial compensation 1997Investment Decisions and Managerial Performance Evaluation

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1999Asset Valuation and Performance Measurement in a Dynamic Agency Setting 2003Disclosure interactions: accounting policy choice and voluntary disclosure effects on the cost of raising outside capital 2010Disclosure, conservatism and the cost of equity capital: A review of the foundation literature 2002Revenue Recognition in a Multiperiod Agency Setting 2006Management Accounting Theory and Practice in German-Speaking Countries

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