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.

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

Cost- and Price Dynamics of Solar PV Modules

This paper develops a model framework and a corresponding empirical inference procedure for estimating long-run marginal cost in industries where production costs decline over time. In the context of the solar photovoltaic module industry, we rely on firm-level financial accounting data to estimate the long-run marginal cost of PV modules for the years 2008 -2013. During those years, the industry experienced both sharp price declines and significant expansions of manufacturing capacity. By comparing the trajectory of average sales prices with the long-run marginal cost estimates, we are in a position to quantify the extent to which actual price declines were attributable to excess capacity as opposed to reductions in production costs. While we find a significant effect attributable to excess capacity for some quarters in our sample period, the dynamics of this industry also points to a rate of cost reductions that is even faster than the 80% learning curve which has described the trajectory of average sales prices over the past three decades

Corporate carbon accounting: balance sheets and flow statements

Current corporate disclosures regarding carbon emissions lack generally accepted accounting rules. The transactional carbon accounting system described here takes the rules of historical cost accounting for operating assets as a template for generating carbon emissions (CE) statements comprising a balance sheet and a flow statement. The asset side of the CE 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 company’s annual corporate carbon footprint calculated as the cradle-to-gate carbon footprint of goods sold during the current period. Taken together, balance sheets and flow statements generate key performance indicators of a company’s past, current, and future performance in the domain of carbon emissions

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 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 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

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