Timing of Information Acquisition and Decision Making on New Product Development Under Decentralized Organization

When an investment is in goodwill, a divisional performance measurement based on residual income is subject to what is included in assets, as IFRS requires.Especially in case the project may be shut down on its way, investment base for the calculation of residual income measures is dependent of the continuation decision on such projects.I investigate residual income performance measure and capital charge rate in the situation where there may be continuation decision on a project whose prospect looks bad.In the analysis of this problem, I compare two schemes on continuation decision on such a project in a bad condition: deliberate scheme under which the manager can refer more detailed but delyed information; precommitment scheme under which the manager makes a prompt decision without any further relevant information.Under deliberate scheme, capital charge rate plays a role of controlling a continuation decision but decreases the incentive of additional expenditure. Under precommitment scheme, capital charge rate has neither role nor negative effect but causes any project in a bad condition to be continued.Which scheme is more desirable depends on two parameters: return when a project fails and principal's opportunity loss caused by continuation of a failed project.In an extended model, I investigate influence of noisy signals and show that the validity of conservative accounting system depends on the principal's opportunity loss