Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting 127
Earnings less riskfree Interest Charge (ERIC) is a new residual income concept for Value Based Management (VBM), which takes the true risk and time preferences of shareholders into account. In this paper management based on ERIC is discussed from a theoretical and from a more practical point of view. Starting in a theoretical world it is shown that ERIC fulfills the specific basic theoretical requirements in all areas of VBM. In particular using ERIC in VBM ensures that planing, performance measurement, management incentives and decentralization are goal congruent with respect to market value. In a second step market imperfections and diverging preferences of managers, which lead to conflict of interest between individual shareholders and between management and shareholders, are considered. Accounting principles for determining residual income as ERIC are established. It is shown that regarding these accounting principles can substantially diminish conflict of interest and enhance shareholder value.
value based management residual income accrual accounting incentives performance measurement