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Incentivizing irreversible investment

Livdan, Dmitry and Nezlobin, Alexander (2021) Incentivizing irreversible investment. Accounting Review. ISSN 0001-4826 (In Press)

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Abstract

Existing dynamic investment models that show that a manager can be incentivized to implement the optimal investment policy rely on the assumption that the firm is operating in an ever-expanding product market. This paper presents an analytically tractable, discrete-time, neoclassical model with irreversible investment and the possibility of unfavorable demand events. We show that even when the principal is uninformed about changes in demand for the firm’s output, there exists a performance measurement system that leads to goal congruent investment incentives for the manager. If the principal can observe the unfavorable demand events, then goal congruence can be achieved using very simple accrual accounting rules, such as straight-line depreciation.

Item Type: Article
Official URL: https://meridian.allenpress.com/accounting-review
Additional Information: © 2021 American Accounting Association
Divisions: Accounting
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Date Deposited: 21 May 2021 16:03
Last Modified: 27 Jun 2021 23:16
URI: http://eprints.lse.ac.uk/id/eprint/110531

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