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Asset Valuation and Performance Measurement in a Dynamic Agency Setting
Abstract
. This paper examines the choice of asset valuation rules from a managerial control perspective. A manager creates value for a firm through his effort choices. To support its operating activities, the firm also engages in financing activities such as credit sales to its customers. Since such financing activities merely change the pattern of cash flows across periods, an optimal compensation scheme must shield the manager form the risk associated with the financing activities. We show that residual income combined with fair value accounting for receivables eliminates this risk and provides an optimal performance measure. In contrast, compensation schemes based only on realized cash flows can be optimal only under exceptional circumstances. We also consider a setting in which there is sufficiently disaggregated information about periodic cash flows so as to eliminate not only the risk associated with financing activities but also the risk associated with customer defaults. The principal ...
... , x n , and the output vector y → � y 1 , y 2 , . . . , y n is made to reconstruct the input vector y → as much as possible by seeking the optimal parameter (w, b), and the reconstructed vector y → is the reliability feature of the power communication network after dimensionality reduction extracted by SAE [21][22][23][24][25]. ...
With the rapid development of artificial intelligence, the information construction of the database plays a very important role in various industries, such as the field of asset appraisal. Therefore, we can use deep learning technology to carry out a dynamic evaluation of asset appraisal, simultaneously adjust, and improve the coordination degree for such system. In this paper, according to asset appraisal theory, we conduct a comprehensive scientific study on asset appraisal about the information construction of the database and the evaluation system, which is conducive to promote the self-improvement and development of the asset appraisal industry in terms of internal control construction. Experimental results show that our method using DL (deep learning) can well accomplish the dynamic evaluation of asset appraisal with competitive performance.
... Many studies and possible applications of these models were done, for example Lee (1999) has tried to unify the previous contributions and the possible implications of the Residual Income Model (RIM) within VBM systems. Other contributions have placed the emphasis on the evaluation of assets and investments as a managerial control tool (Dutta, Reichelstein, 1999). ...
... We assume a single consumption date and no discounting for simplicity. Our results carry over with minor modifications to a model with time-additive utility, multiple consumption dates, and discounting, while their qualitative nature remains unchanged; for details, see Dutta and Reichelstein (1999), Christensen, Feltham, Hofmann, and Şabac (2003), and Şabac (2007, 2008). ...
Both soft, non‐contractible, and hard, contractible, information are informative about managerial ability and future firm performance. If a manager's future compensation depends on expectations of ability or future performance, then the manager has implicit incentives to affect the information. We examine the real incentive effects of soft information in a dynamic agency with limited commitment. When long‐term contracts are renegotiated, the rewards for future performance inherent in long‐term contracts allow the principal partial control over the implicit incentives. This is because the soft information affects the basis for contract renegotiation. With short‐term contracts, the principal has no control over the basis for contract negotiation, thus long‐term contracts generally dominate short‐term contracts. With long‐term contracts, the principal's control over implicit incentives is characterized in terms of effective contracting on an implicit aggregation of the soft information that arises from predicting (forming expectations of) future performance. We provide sufficient conditions for soft information to have no real incentive effects. In general, implicit incentives not controllable by the principal include fixed effects, such as career concerns driven by labour markets external to the agency. When controllable incentives span the fixed effects of career concerns, the latter have no real effects with regard to total managerial incentives—they would optimally be the same with or without career concerns. Our analysis suggests empirical tests for estimating career concerns that should explicitly incorporate non‐contractible information.
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... Holmstrom andMilgrom (1987, 1991) have shown that the optimality of linear contracts can be derived in a more general setting, where an agent controls the drift rate of a stochastic process by his effort. For literature using the LEN model in the area of performance measurement, see, for instance, Feltham and Xie (1994) and Dutta and Reichelstein (1999. 15 For the same representation of managerial preference in a multi-period contracting setting, see Sliwka (2002) and Dutta and Reichelstein (2003). ...
This paper studies, in a dynamic agency setting, how incentives and contractual efficiency are affected by leading indicators of firms’ future financial performance. In our two-period model, a leading indicator variable provides a noisy forecast of the uncertain return from the manager’s long-term effort, and both contracting parties cannot refrain from renegotiating contract terms based on updated information. We find that the leading indicator can reduce the manager’s long-term effort incentive, as it allows the firm owner to capture more of the resulting return through renegotiated wages (i.e., the manager is held up). By reducing the uncertainty about future aggregate cash flows, the leading indicator also exacerbates the “ratchet” effect and discourages the manager’s short-term effort. In equilibrium, as the leading indicator becomes more accurate in forecasting future cash flows, the first-period contract attaches higher explicit weights to both the forward-looking leading indicator and backward-looking cash flow, and yet the manager may find it optimal to reduce both the short- and long-term efforts. We further show that with a more accurate leading indicator variable, the explicit incentive on the lagging cash flow may increase more than that on the leading indicator, and the equilibrium firm profit may decrease and diverge from the manager’s equilibrium efforts. © 2018 Springer Science+Business Media, LLC, part of Springer Nature
Deferred compensation is often proposed as an instrument to prevent managerial myopia. However, empirical studies show that its practical use is limited when it comes to managerial retirement. We study the optimal design of accounting‐based deferred compensation for retiring managers. While deferred compensation is useful in establishing long‐term incentives, it causes contracting frictions in subsequent periods. Deferred bonuses of retiring managers imply inefficiently weak incentives for incoming managers. This down‐scaling effect renders deferred compensation less useful in providing long‐term incentives. We also find that the down‐scaling effect has implications for the desirability of accounting timeliness—that is, the timely recognition of future cash flows in current accounting earnings—from a stewardship perspective. If managers' long‐term actions are sufficiently important, higher timeliness can cause more myopic managerial incentives.
This study employs the LEN model in analyzing aggregations and disaggregate use of inter‐temporally correlated performance measures in two‐period agencies with limited commitment. The optimal disaggregate use where an agent's incentive is on basic measures suffers information loss to depend on agency particulars. Induced action is restricted by the subsequent period action, and limited commitment leads to fostering late optimal effort inducement. Performance measure aggregation yields inaccurate inter‐temporal information relative to the disaggregate use and leads to raising early optimal effort inducement. Both the total informativeness and the difference in informativeness of performance measures fortify early optimal effort inducement.
We consider the problem of a seller of data who sells information to a buyer regarding an unknown (to both parties) state of the world. Traditionally, the literature explores one-round strategies for selling information because of the seller’s holdup problem: once a portion of the data set is released, the buyer’s estimate improves, and as a result, the value of the remaining data set drops. In this paper, we show that this intuition is true when the buyer’s objective is to improve the precision of the estimate. On the other hand, we establish that when the buyer’s objective is to improve downstream operational decisions (e.g., better pricing decisions in a market with unknown elasticity) and when the buyer’s initial estimate is misspecified, one-round strategies are outperformed by selling strategies that initially provide free samples. In particular, we provide conditions under which such free-sample strategies generate strictly higher revenues than static strategies and illustrate the benefit of providing data samples for free through a series of examples. Furthermore, we characterize the optimal dynamic pricing strategy within the class of strategies that provide samples over time (at a constant rate), charging a flow price until some time when the rest of the data set is released at a lump-sum amount.
This paper was accepted by Itai Ashlagi, revenue management and market analytics.
One fundamental problem in production function is to find and submit a variable which can be able to illustrate the effect of human capital on economic growth well. However in most studies, only some parts of human capital are illustrated by the submitted variables. Accordingly, the main purpose of this study is to determine a variable which covers more parts of the human capital. Therefore, initially three different approaches and methods which represent the exact value of human capital are compared. Through analyzing these approaches and methods a conceptual framework was achieved which indicates the human capital as current value of the past investments and the future incomes. Another result of this study is that the human capital is not only consequence of the education which is provided by the government, but also other parameters like health, experience and etc. on the other hand, private investment and families are involved. Ultimately, comparing the methods applied by economist in different countries for different time periods implies that although these methods and approaches are different, there was a convergence in estimating the model through these methods. Hence, the convergence proves that these methods are somewhat precise and scientific. کلیدی واژگان : سرماي ة انساني، پولي، ارزش مفهومي، مدل سرماية محاسقة های رويکرد انساني
This paper considers incentive provisions for a manager who makes investment decisions. The manager's performance measure can be based on current accounting information: cash flow, depreciation, book value, and current investment. We argue that Residual Income is the unique (linear) performance measure that achieves goal congruence, i.e., the manager accepts all positive NPV projects, and only those. If the manager has the same discount rate as the owner, the depreciation rules remain indeterminate. However, if the manager's discount rate assumes potentially a whole range of values, then a particular depreciation policy combined with Residual Income is the unique way to achieve goal congruence.
This paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measure of income which include allocations for investment expenditures. The major result is that a unique allocation rule exists, called the relative marginal benefits (RAB) rule, which always induces the manager to choose the efficient investment, no matter how the manager values his own personal cash flows from wage compensation over time and no matter what wage schedule is in place (so long as wages are weakly increeasing each period's income). That is, the same allocation rule works for every possible managerial utility function over wage payments and every monotone wage function over accounting incomes. Thus the firm can choose an allocation rule which induces efficient investment choices without knowing the manager's preferences. Furthermore, since the same rule works for every monotone wage schedule, the firm is left a "degree of freedom" to choose the wage schedule to solve some other incentive problem. In addition to demonstrating the optimality of the RMB rule and describing its properties, the paper considers how currently used allocation rules qualitatively affect managers' investment incentives. It is shown that the practice of expensing intangible assets (i.e., allocating 100 percent of the cost to the current perios) causes mangers to underinvest relative to the efficient level. The case of tangible assets is more complicated. It appears that current practices may cause either underinvestment or overinvestment, depending on various factor described in more detail in the text.
The paper addresses the following question: in a multiple-date agency setting, under what conditions will the dividend policy be of no incentive relevancy? It is shown that if the accounting data—earnings, book values, and dividends — satisfy standard owners' equity accounting constructs, and if these indicate that paying dividends is a zero NPV activity, then dividend policy incentive irrelevancy applies. The basic idea is to ensure that the (history of) abnormal (residual) earnings summarize the relevant information and the solution to the incentive problem. The paper also compares classical value irrelevancy with incentive irrelevancy, and the analysis shows that conditions for incentive irrelevancy are more stringent.
This paper uses an agency theory model in which the agent's actions are multi-dimensional to analyze the optimal weights to apply to performance measures in a compensation contract. We show how the optimal contract trades off the congruity of the overall performance measure with the desire to minimize the risk imposed upon the agent. In contrast to the single action case, we find that an increase in the sensitivity of a performance measure to an agent's action does not necessarily increase the weight placed on that performance measure, even if that measure is perfectly congruent with the firm's outcome.
Residual income subtracts from operating income an interest charge for invested capital. Residual income can be calculated each period from current accounting information, unlike discounted cash flow (DCF), which requires the knowledge of future cash flows. This paper provides a normative justification for residual-income maximization by showing that if investment decisions are made myopically each period to maximize residual income, the resulting path asymptotically maximizes discounted cash flow. Thus, under the assumptions of the model, residual-income maximization is a heuristic that leads to the long-run DCF-optimum.
The assumption of constant risk aversion often leads to a considerable simplification of decision theoretic analyses. It is shown that this restriction on constant risk aversion permits the description of a wide range of risk averse patterns between the extreme cases of risk neutrality and the exclusive orientation on the pessimistic maxmin criterion. In particular, a new axiomatic foundation of the constant risk aversion is given and a series of properties for the certainty equivalent are derived. Possible applications are shown by the treatment of risk premiums, values of information, portfolio selection, capital market theory and syndicates.Die Zugrundelegung einer konstanten Risikoaversion vereinfacht entscheidungstheoretische Analysen oft erheblich. In dieser Arbeit wird gezeigt, da die Beschrnkung auf konstante Risikoaversion ein groes Spektrum risikoaverser Verhaltensweisen zwischen den Extremfllen der Risikoneutralitt und der alleinigen Orientierung am pessimistischen Maximin-Kriterium zu beschreiben gestattet. Insbesondere werden eine neue axiomatische Begrndung der konstanten Risikoaversion vorgestellt und eine Reihe von Eigenschaften fr das zugehrige Sicherheitsquivalent hergeleitet. Zur Verdeutlichung der Anwendungsmglichkeiten werden exemplarisch Risikoprmien, Informationswerte, Portfolio-Selektion und Kapitalmarkttheorie sowie Syndikate behandelt.
This paper considers incentive provisions for a manager who makes investment decisions. The manager's performance measure can be based on current accounting information: cash flow, depreciation, book value, and current investment. We argue that Residual Income is the unique (linear) performance measure that achieves goal congruence, i.e., the manager accepts all positive NPV projects, and only those. If the manager has the same discount rate as the owner, the depreciation rules remain indeterminate. However, if the manager's discount rate assumes potentially a whole range of values, then a particular depreciation policy combined with Residual Income is the unique way to achieve goal congruence.
The dynamic dimension introduces new questions in moral hazard models. Thus, the roles of memory and commitment have recently raised a marked interest. The goal of this paper is to discuss and clarify the issues at hand and to present some new results. We show that two conditions are necessary for the optimal long-term contract to be implementable via spot contracts: first, the long-term optimum should be renegotiation-proof; second, spot contracts should provide efficient consumption smoothing. We discuss how the availability of credit to the agent affects these two prerequisites. We also study the hitherto neglected case in which the repetition of the moral hazard problem generates hidden information at recontracting dates: the optimal renegotiation-proof contract then implements the minimum effort level, unless it involves randomized savings.
This paper employs an agency model where a manager has a two-dimensional action choice to study how the information content of earnings affects the design of compensation contracts based on earnings and price. Price is modeled as an endogenous variable that reflects all available information, including earnings. Two settings are contrasted. In the first, earnings and price reflect the same underlying information about firm value, while in the second, earnings reflect a subset of the information reflected in price. It is shown that differences in information content substantially alter the characteristics of compensation contracts based on earnings and price.