A MICROECONOMIC ANALYSIS OF THE AMEY/SOLOMONS DEBATE

This paper analyses the Solomons/Amey debate in terms of the traditional theory of the firm. The scope of the paper includes a clarification of the working capital issue, and in particular, the appropriate charge which should be recorded in the periodic income statement submitted by management. The analysis then examines Amey's proposition that Solomons is confusing the investment decision with the operating decision and concludes that Amey's position is correct. The reporting framework which would induce divisional management to act both in the short- and long-run interests of a group is examined and there is adiscussion of the market strategies which may be dictated by the divisional periodic accounting reports.