Multidivisional firms frequently rely on external market prices in order to value internal transactions across profit centers. This paper examines the transfer pricing problem in a setting in which an upstream division has monopoly power in selling a proprietary component both to a downstream...

This paper studies an incomplete contracting model to compare the effectiveness of alternative transfer pricing mechanisms. Transfer pricing serves the dual purpose of guiding intracompany transfers and providing incentives for upfront investments at the divisional level. When transfer prices...

This paper examines alternative accrual accounting rules from an incentive and control perspective. For a range of common production, financing and investment decisions we consider alternative asset valuation rules. The criterion for distinguishing among these rules is that the corresponding...

This paper develops a multiperiod agency model to study the use of leading indicator variables in managerial performance measures. In addition to the familiar moral hazard problem, the principal faces the task of motivating a manager to undertake quot;softquot; investments. These investments are...

This paper examines a multiperiod principal-agent model in which a divisional manager has superior information regarding the profitability of an investment project available to his division. The manager also contributes to the periodic operating cash flows of his division through personally...

This paper examines a multi-period agency model in which a manager makes investment decisions in each period. Performance measures based only on realized cash flows are essentially uninformative about value creation at any intermediate point in time. If the principal has access to additional...

The reported cost of a product frequently contains historical cost components that reflect past investments in productive capacity. We examine a setting wherein a firm makes a sequence of overlapping capacity investments. Earlier research has identified particular accrual accounting...

Investment decisions frequently require coordination across multiple divisions of a firm. This paper explores a class of capital budgeting mechanisms in which the divisions issue reports regarding the anticipated profitability of proposed projects. To hold the divisions accountable for their...

Firms frequently value internal transactions at external market prices subject to an intracompany discount. These discounts are generally explained by cost differences between internal and external sales. In a model where the supplying division has monopoly power in the external market, we find...

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...