| In this dissertation I study managerial incentives and performance measurement using several approaches. First, I examine the relative effectiveness of three transfer-pricing methods in inducing managers to invest efficiently in intangible assets. Royalty-based transfer pricing results in inefficiencies while negotiated transfer pricing provides efficient incentives for the buyer, but creates a hold-up problem for the seller. A royalty-based transfer pricing scheme that can be renegotiated, however, outperforms both of the other methods, and in some cases induces first-best investment. It does so by providing efficient incentives for the downstream division while protecting the upstream division from a hold-up problem.; This result contrasts with previous results in the literature on specific investment and asset transfers that finds that both parties are worse off when renegotiation cannot be prevented. My result differs from these because the asset in my model is a public good and the seller receives no incremental payoff if negotiations break down.; Next. I study residual income based compensation plans. Consultants and some academics argue that residual income is superior to traditional accounting measures in inducing managers to make efficient investment and operating decisions. I examine conflicting consultant recommendations about the computation of the residual income metric, particularly regarding adjustments for deferred taxes. Using a multi-period investment model, I show that the appropriate adjustment depends on the other choice variables and cannot be considered in isolation. In particular, the decision to capitalize deferred taxes versus dealing with them on a cash basis depends on the depreciation method chosen and I argue that this reasoning extends to adjustments for other items.; Finally, I study stock market returns around the announcement of a firm's decision to implement a residual-income based compensation plan. If residual income is superior to traditional accounting measures, I expect the stock market to react positively when a firm announces that it will adopt such a plan. I compare adopter returns to industry benchmarks and various control groups chosen to mitigate the problem of self-selection and I find evidence of a positive stock market reaction in the year prior to adoption. |
