This paper develops a multiperiod principal‐agent model in which a manager must be given incentives to undertake investments and to exert personally costly effort. Investments are “soft” (e.g., intangible assets) and therefore entail measurement errors for the accounting system as it seeks to separate investments from operating expenditures. This separation is of no concern to the stock market, which draws on its own information about future cash flows resulting from current investments. The firm's stock price, however, reflects all value‐relevant information, parts of which are not incentive relevant. Optimal incentive provisions must combine “forward‐looking” market information with “backward‐looking” accounting information. Under certain conditions, optimal performance measures can be expressed as a weighted average of economic value added (residual income) and market value added.
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1 October 2005
Research Article|
October 01 2005
Stock Price, Earnings, and Book Value in Managerial Performance Measures
Sunil Dutta;
Sunil Dutta
aUniversity of California, Berkeley.
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Stefan Reichelstein
Stefan Reichelstein
bStanford University.
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Online ISSN: 1558-7967
Print ISSN: 0001-4826
American Accounting Association
2005
The Accounting Review (2005) 80 (4): 1069–1100.
Citation
Sunil Dutta, Stefan Reichelstein; Stock Price, Earnings, and Book Value in Managerial Performance Measures. The Accounting Review 1 October 2005; 80 (4): 1069–1100. https://doi.org/10.2308/accr.2005.80.4.1069
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