Controlling Investment Decisions: Hurdle Rates and Intertemporal Cost Allocation

We examine alternative performance measures for a manager who has superior information about the profitability of an investment project and who contributes to periodic operating cash flows through his efforts. We find that residual income based on a suitably chosen depreciation schedule is an optimal performance measure. To address the underlying asymmetric information problem, the capital charge rate in the calculation of residual income should be equal to the firm's hurdle rate, which is the critical internal rate of return below which the principal would not want to fund the project. This hurdle rate includes the compensation cost for the better informed manager and therefore exceeds the principal's cost of capital. We also show that residual income remains an optimal performance measure in settings where multiple divisions compete for scarce investment funds. In order to solve the resource allocation problem, the capital charge rate must then be increased to a competitive hurdle rate.

Corporate carbon reporting: Improving transparency and accountability

Numerous multinational firms have recently pledged to reduce their greenhouse gas emissions to a net-zero position by the year 2050. These pledges currently lack a unified measurement and reporting structure, leaving the public unsure about the extent of the corporate commitments. Here, we propose a Time-Consistent Corporate Carbon Reporting (TCCR) standard that entails an initial forecast of a firm’s future carbon emissions trajectory, periodic revisions of the earlier forecasts, and updates on emissions reductions actually achieved at different points in time. The TCCR standard is applicable to alternative carbon footprint metrics, including a company’s direct emissions, carbon emissions in goods sold, or the carbon footprint assessed for individual sales products. Companies adopting the TCCR standard will provide added transparency and accountability for their carbon disclosures

Corporate carbon reduction pledges: An effective tool to mitigate climate change?

In the intensifying public debate about limiting the harmful effects of climate change, many global corporations have recently articulated so-called “net-zero” goals for reducing and ultimately eliminating their own greenhouse gas emissions. We first examine the details of the carbon reduction goals articulated by seven large firms in different industries. The individual reduction goals are shown to vary substantially in terms of specificity and scope, largely due to variations in the measurement of carbon footprints. Particular sources of variation arise from how “gross emissions” are determined and from firms’ willingness to recognize carbon credits that offset their own emissions. Keywords: Carbon Emissions; corporate reporting; net-zero goals; carbon offset

Corporate carbon emission statements

Current corporate disclosures regarding carbon emissions lack commonly accepted accounting rules. The accrual accounting system for carbon emissions described here is grounded in the rules of historical cost accounting for operating assets, enabling the preparation of balance sheets and flow statements. The asset side of the balance sheet reports the carbon emissions embodied in operating assets. The liability side conveys the firm’s cumulative direct emissions into the atmosphere as well as the cumulative emissions embodied in goods acquired from suppliers less those sold to customers. Flow statements report the cradle-to-gate carbon footprint of goods sold during the current period. Taken together, balance sheets and flow statements generate multiple indicators of a company’s past, current and future performance with regard to carbon emission

Corporate Carbon Emission Statements

Current corporate disclosures regarding carbon emissions lack commonly accepted accounting rules. The accrual accounting system for carbon emissions described here is grounded in the rules of historical cost accounting for operating assets, enabling the preparation of balance sheets and flow statements. The asset side of the balance sheet reports the carbon emissions embodied in operating assets. The liability side conveys the firm’s cumulative direct emissions into the atmosphere as well as the cumulative emissions embodied in goods acquired from suppliers less those sold to customers. Flow statements report the cradle-to-gate carbon footprint of goods sold during the current period. Taken together, balance sheets and flow statements generate multiple indicators of a company’s past, current and future performance with regard to carbon emissions

The impact of carbon disclosure mandates on emissions and financial operating performance

We examine whether a disclosure mandate for greenhouse gas emissions creates stakeholder pressure for firms to subsequently reduce their emissions. For UKincorporated listed firms such a mandate was adopted in 2013. Using a difference- indifferences design, we find that firms affected by the mandate reduced their emissions – depending on the specification – by an incremental 14-18% relative to a control group. This reduction was accompanied by an average 9% increase in production costs. At the same time, the treated firms were able to increase their sales by an almost compensating amount. Taken together, our findings provide no indication that the disclosure requirement led to a significant deterioration in the financial operating performance of the treated firms, despite the significant carbon footprint reduction following the disclosure mandate

Capacity rights and full cost transfer pricing

This paper examines the theoretical properties of full cost transfer prices in multi-divisional firms. In our model, divisional managers are responsible for the initialacquisition of productive capacity and the utilization of that capacity in subsequentperiods, once operational uncertainty has been resolved. We examine alternativevariants of full cost transfer pricing with the property that the discounted sum oftransfer payments is equal to the initial capacity acquisition cost and the presentvalue of all subsequent variable costs of output supplied to a division. Our analysisidentifies environments where particular variants of full cost transfer pricing induceefficiency in both the initial investments and the subsequent output levels. Ourfindings highlight the need for a proper integration of intracompany pricing rules anddivisional control rights over capacity assets