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Analytical Properties of Earned Economic Income

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>03/1995
<mark>Journal</mark>British Accounting Review
Issue number1
Volume27
Number of pages29
Pages (from-to)5-33
Publication statusPublished
Original languageEnglish

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.