Accrual-based compensation, depreciation and investment decisions
- 1 July 2003
- journal article
- research article
- Published by Taylor & Francis in European Accounting Review
- Vol. 12 (2) , 287-309
- https://doi.org/10.1080/0963818031000087835
Abstract
The paper studies the usefulness of accruals relative to cash flows for performance measurement in short-term contracts, if an agent undertakes activities with long-term and short-term consequences. It characterizes an optimal depreciation method for incentive purposes, and shows that it is not consistent with traditional depreciation methods. Rather, it aligns the performance measure with the expected long-term consequences of the investment, and shifts away compensation risk from the agent. The paper also identifies conditions under which accruals outperform cash flows as a performance measure even if the agent can manipulate the depreciation method.Keywords
This publication has 15 references indexed in Scilit:
- Balancing Performance MeasuresJournal of Accounting Research, 2001
- Providing Managerial Incentives: Cash Flows versus Accrual AccountingJournal of Accounting Research, 2000
- Residual income past and futureManagement Accounting Research, 1998
- Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance MeasureJournal of Political Economy, 1997
- Project selection and audited accrual measurement in a multi-task settingEuropean Accounting Review, 1995
- Accounting income, stock price, and managerial compensationJournal of Accounting and Economics, 1993
- Short-term contracts and long-term agency relationshipsJournal of Economic Theory, 1990
- Long-term, Short-term and Renegotiation: On the Value of Commitment in ContractingEconometrica, 1990
- Accrual versus cash-basis accounting methods: An agency-theoretic comparisonJournal of Accounting and Public Policy, 1989
- Contracts without memory in multiperiod agency modelsJournal of Economic Theory, 1985