The Effects of Return on Investment and Residual Income Measures on Risk-Taking in Capital Investment Decisions

47 Pages Posted: 30 Jan 2020 Last revised: 29 Sep 2020

See all articles by Jason Brown

Jason Brown

Indiana University - Kelley School of Business - Department of Accounting

Patrick Martin

University of Pittsburgh

Geoffrey B. Sprinkle

Indiana University - Kelley School of Business - Department of Accounting

Dan Way

Clemson University - School of Accountancy

Date Written: December 1, 2019

Abstract

We conduct an experiment to examine the separate and interactive effects of individuals’ risk preferences and two commonly-used performance measures – return on investment (ROI) and residual income (RI) – on risk-taking in capital investment decisions. We predict and find that the use of ROI as a performance measure leads to riskier choices as compared to RI, and that this effect is concentrated in relatively more risk-averse individuals. We also provide process evidence that reveals some of the ways in which ROI and RI performance measures affect decision making. Collectively, our results contribute to literature examining the effects of accounting information and performance measures on managers’ risk-taking behaviors.

Keywords: Risk-taking; return on investment; residual income; risk preferences

Suggested Citation

Brown, Jason and Martin, Patrick and Sprinkle, Geoffrey B. and Way, Dan, The Effects of Return on Investment and Residual Income Measures on Risk-Taking in Capital Investment Decisions (December 1, 2019). Available at SSRN: https://ssrn.com/abstract=3516062 or http://dx.doi.org/10.2139/ssrn.3516062

Jason Brown (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Patrick Martin

University of Pittsburgh ( email )

3950 Roberto Clemente Drive
Pittsburgh, PA 15260
United States

Geoffrey B. Sprinkle

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-3514 (Phone)
812-855-4985 (Fax)

Dan Way

Clemson University - School of Accountancy ( email )

101 Sikes Ave
Clemson, SC 29634
United States

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