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| Author: | Friedl, G. |
| Title: | Incentive properties of residual income when there is an option to wait |
| Journal: | Schmalenbach Business Review
2005 : JAN, VOL. 57:1, p. 3-21 |
| Index terms: | Finance Investments Management Decision making Performance measurement |
| Language: | eng |
| Abstract: | Academic literature shows that residual income has important incentive properties (henceforth as: inc-ps.) when management bases investment decisions (here as: inv-decs.) on the net present value (NPV) rule. This analysis focuses on the case in which inv-decs. can be postponed, when management must extend the simple NPV rule by considering an option value. The analysis shows that some important inc-ps. of residual income still hold when there is an option to wait, but only when the residual income measure is correctly adjusted. There is also provided an incentive-based explanation of why the capital charge rate within firms is often significantly higher than the firm's cost of capital. |
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