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See R. Hamilton, An Introduction to Merchandize, Edinburgh (1777), and A. Marshall, Principles of Economics, MacMillan Press Ltd., London, New York (1890). Coined residual income by General Electric in the 1950s, this concept also has been labeled as excess earnings by J. Canning, The Economics of Accountancy, Ronald Press, New York (1929) and G. Preinreich, "The Law of Goodwill," Accounting Review, Vol. 12 (1936), 317-329, G. Preinreich, "Goodwill in Accountancy," Journal of Accountancy (July, 1937), 28-50, G. Preinreich, "Annual Survey of Economic Theory: The Theory of Depreciation," Econometrica (January 1938), 219-231; super-profits by H. Edey, "Business Valuation, Goodwill and the Super-profit Method," Accountancy, (January/February, 1957); excess realizable profit by E. Edwards and P. Bell, The Theory and Measurement of Business Income, University of California Press, Berkeley (1961); excess income by J. Kay, "Accountants, too, Could Be Happy in a Golden Age: The Accountant's Rate of Profit and the Internal Rate of Return," Oxford Economic Papers, Vol. 28 (1976), 447460; and abnormal earnings by K. Peasnell, "On Capital Budgeting and Income Measurement" Abacus, Vol. 17 (1981), 52-67, K. Peasnell, "Some Formal Connection Between Economic Values and Yields and Accounting Numbers," Journal of Business Finance and Accounting, Vol. 9 (1982), 361-381 and G. Feltham and J. Ohlson, "Valuation and Clean Surplus Accounting for Operating and Financing Activities," Contemporary Accounting Research, Vol. 11 (1995), 689-731. 2 Capital is generally defined to be assets (net of accumulated depreciation and amortization) invested in goingconcern operating activities, or equivalently, contributed and retained debt and equity capital at the beginning of the period (net of non-operating capital). Non-interest bearing debt capital (e.g., accounts payable) is sometimes subtracted from total capital under the argument that it does not require a return.

Put still another way, residual income can be seen in (1d) to equal traditional accounting net income (NI) minus a charge for the cost of equity capital, where the cost of equity capital can be expressed as the beginning-of-period book value of equity (BV) times the cost of equity capital (k). That is, (1d) RI t = NI t – [k t x BV t-1]

A look at the right hand sides of expressions (1a) to (1d) suggests that there are three main opportunities to increase residual income. Other things equal, managers will increase residual income to the extent they increase NOPAT and ROA, decrease WACC (though this is inherently more difficult), or reallocate capital away from negative ‘spread’ toward positive ‘spread’ investments. These opportunities become incentives when managers are evaluated or compensated based on residual income (or EVA). Later in this article we review evidence on the effects of these incentives on managements’ actions. To see more clearly how residual income relates to shareholder wealth, consider the familiar discounted dividend model of equity valuation, where the market value of equity, Vt, is expressed as the net present value of future dividends: (2) Vt = ∑

This expression can be restated using the so-called ‘clean surplus substitution,’ where clean surplus is th本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。