Abstract
Over the past decade, residual income has attracted considerable attention in the academic and professional literature. During this time, many leading businesses have adopted proprietary variants of residual income as a measure of their corporate success. This essay analyses the utility of residual income as a performance measure. We focus on two themes: (i) the relationship between the stream of ex‐ante residual incomes and the net present value of a project; and (ii) the association between reported ex‐post residual income and change in shareholder wealth. We conclude that residual income lacks theoretical support as a measure of wealth created. We suggest possible reasons for executives adopting residual income and why it has the potential to result in increased organisational performance.
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