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Analytical Properties of Earned Economic Income

Peasnell, Ken (1995) Analytical Properties of Earned Economic Income. British Accounting Review, 27 (1). pp. 5-33. ISSN 0890-8389

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Abstract

This paper examines the theoretical properties of J. R. Grinyer’s ‘earned economic income’ (EEI) model. Features examined include the connection between EEI and residual income; the proportionality relationship between EEI book values and cost allocations and their present value and deprival value counterparts; the extent to which EEI is affected by arbitrariness of allocations and difficulties of aggregation; and the possibilities which EEI presents for manipulation by informed insiders. The most important of the findings regarding the suitability of EEI for its declared purpose as a tool for evaluating managerial performance are summed up in two propositions. Proposition I states that EEI depreciation computed by reference to cost savings will have the properties required by Grinyer if and only if the ratio of cost savings to revenue is constant across all periods. Proposition II contends that EEI will yield a more reliable measure of performance than re-computed net present value if and only if the investment is believed to be worthwhile.

Item Type: Article
Journal or Publication Title: British Accounting Review
Subjects: H Social Sciences > HG Finance
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 55075
Deposited By: ep_importer_pure
Deposited On: 13 Jun 2012 16:05
Refereed?: Yes
Published?: Published
Last Modified: 09 Apr 2014 23:39
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/55075

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