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Accrual-based compensation, depreciation and investment decisions

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  • Alfred Wagenhofer

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.

Suggested Citation

  • Alfred Wagenhofer, 2003. "Accrual-based compensation, depreciation and investment decisions," European Accounting Review, Taylor & Francis Journals, vol. 12(2), pages 287-309.
    • Handle: RePEc:taf:euract:v:12:y:2003:i:2:p:287-309
    DOI: 10.1080/0963818031000087835
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    References listed on IDEAS

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    1. Dirk Sliwka, 2002. "On the Use of Nonfinancial Performance Measures in Management Compensation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 487-511, September.
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    1. Sunil Dutta & Stefan Reichelstein, 2003. "Leading Indicator Variables, Performance Measurement, and Long‐Term Versus Short‐Term Contracts," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 837-866, December.
    2. Bloomfield, Matthew & Gipper, Brandon & Kepler, John D. & Tsui, David, 2021. "Cost shielding in executive bonus plans," Journal of Accounting and Economics, Elsevier, vol. 72(2).
    3. Mark Bagnoli & Susan G. Watts, 2005. "Conservative Accounting Choices," Management Science, INFORMS, vol. 51(5), pages 786-801, May.
    4. Tim Baldenius & Stefan Reichelstein, 2005. "Incentives for Efficient Inventory Management: The Role of Historical Cost," Management Science, INFORMS, vol. 51(7), pages 1032-1045, July.
    5. Biehl, Henrike & Bleibtreu, Christopher & Stefani, Ulrike, 2024. "The real effects of financial reporting: Evidence and suggestions for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    6. Dengjun Zhang & Jinghua Xie, 2017. "Investment and revenue cap under incentive regulation: The case study of the Norwegian electricity distributors," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1400900-140, January.
    7. Gunther Friedl & Björn Anton, 2010. "Anforderungen an ein wertorientiertes Management Accounting in Banken," Schmalenbach Journal of Business Research, Springer, vol. 62(61), pages 83-107, January.
    8. Niklas Lampenius & Tobias Buerkle, 2014. "Arguments in Favour of Tax Neutral Cost Allocation," Abacus, Accounting Foundation, University of Sydney, vol. 50(3), pages 296-313, September.
    9. Christian Gaber, 2005. "Bewertung von Fertigerzeugnissen zu Volloder Teilkosten? Ansatz von Forderungen zum Nennwert oder Barwert?," Schmalenbach Journal of Business Research, Springer, vol. 57(4), pages 325-352, June.
    10. Lindblom, Ted & Sjögren, Stefan, 2009. "Increasing goal congruence in project evaluation by introducing a strict market depreciation schedule," International Journal of Production Economics, Elsevier, vol. 121(2), pages 519-532, October.
    11. Wolfgang Schultze & Andreas Weiler, 2007. "Performancemessung und Wertgenerierung: Entlohnung auf Basis des Residualen Ökonomischen Gewinns," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 18(2), pages 133-159, August.
    12. Christian Hofmann, 2005. "Gestaltung von Erfolgsrechnungen zur Steuerung langfristiger Projekte," Schmalenbach Journal of Business Research, Springer, vol. 57(8), pages 689-716, December.
    13. Thomas Pfeiffer, 2006. "Zur „Doppelzählungsproblematik“ bei der Kapitalkostenbestimmung bei internem Risikoverbund und Kapitalmarktinteraktion," Schmalenbach Journal of Business Research, Springer, vol. 58(55), pages 79-108, January.

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