diff --git a/src/compiler/core.ts b/src/compiler/core.ts
index 8560ccde32c..72ece69ccd1 100644
--- a/src/compiler/core.ts
+++ b/src/compiler/core.ts
@@ -1952,6 +1952,15 @@ namespace ts {
         return normalized;
     }
 
+    export function normalizePathAndRoot(path: string): string {
+        const normalized = normalizePathAndParts(path).path;
+        const rootLength = getRootLength(normalized);
+        if (rootLength === 0) {
+            return normalized;
+        }
+        return path.substr(0, rootLength).toLowerCase() + path.substr(rootLength);
+    }
+
     export function normalizePath(path: string): string {
         return normalizePathAndParts(path).path;
     }
diff --git a/src/compiler/emitter.ts b/src/compiler/emitter.ts
index 7a1d88d3bfd..f421a180257 100644
--- a/src/compiler/emitter.ts
+++ b/src/compiler/emitter.ts
@@ -37,7 +37,7 @@ namespace ts {
             for (const sourceFile of sourceFiles) {
                 const jsFilePath = getOwnEmitOutputFilePath(sourceFile, host, getOutputExtension(sourceFile, options));
                 const sourceMapFilePath = getSourceMapFilePath(jsFilePath, options);
-                const declarationFilePath = !isSourceFileJavaScript(sourceFile) && (emitOnlyDtsFiles || options.declaration) ? getDeclarationEmitOutputFilePath(sourceFile, host) : undefined;
+                const declarationFilePath = !isSourceFileJavaScript(sourceFile) && (emitOnlyDtsFiles || options.declaration || options.referenceTarget) ? getDeclarationEmitOutputFilePath(sourceFile, host) : undefined;
                 action({ jsFilePath, sourceMapFilePath, declarationFilePath }, sourceFile, emitOnlyDtsFiles);
             }
         }
diff --git a/src/compiler/program.ts b/src/compiler/program.ts
index 464e5073bc3..4d848f20655 100755
--- a/src/compiler/program.ts
+++ b/src/compiler/program.ts
@@ -614,8 +614,8 @@ namespace ts {
 
         // List of collected files is complete; validate exhautiveness if this is a project with a file list
         if (options.referenceTarget && rootNames.length < files.length) {
-            const normalizedRootNames = rootNames.map(r => normalizePath(r));
-            const sourceFiles = files.filter(f => !f.isDeclarationFile).map(f => normalizePath(f.path));
+            const normalizedRootNames = rootNames.map(r => normalizePathAndRoot(r));
+            const sourceFiles = files.filter(f => !f.isDeclarationFile).map(f => normalizePathAndRoot(f.path));
             for (const file of sourceFiles) {
                 if (normalizedRootNames.every(r => r !== file)) {
                     programDiagnostics.add(createCompilerDiagnostic(Diagnostics.File_0_is_not_in_project_file_list_Projects_must_list_all_files_or_use_an_include_pattern, file));
@@ -687,7 +687,7 @@ namespace ts {
                 const emittedFiles = filter(files, file => sourceFileMayBeEmitted(file, options, isSourceFileFromExternalLibrary));
                 if (options.referenceTarget) {
                     // Project compilations never infer their root from the input source paths
-                    commonSourceDirectory = getNormalizedAbsolutePath(options.rootDir || ".", currentDirectory);
+                    commonSourceDirectory = getNormalizedAbsolutePath(options.rootDir || getDirectoryPath(options.configFilePath), currentDirectory);
                 }
                 else if (options.rootDir && checkSourceFilesBelongToPath(emittedFiles, options.rootDir)) {
                     // If a rootDir is specified and is valid use it as the commonSourceDirectory
diff --git a/src/harness/unittests/projectReferences.ts b/src/harness/unittests/projectReferences.ts
index 882e8ba6e2e..14fc0fdf503 100644
--- a/src/harness/unittests/projectReferences.ts
+++ b/src/harness/unittests/projectReferences.ts
@@ -45,7 +45,7 @@ namespace ts {
         return names.map((n, i) => `import * as mod_${i} from ${n}`).join("\r\n");
     }
 
-    function testProjectReferences(spec: TestSpecification, entryPointConfigFileName: string, checkResult: (prog: Program) => void) {
+    function testProjectReferences(spec: TestSpecification, entryPointConfigFileName: string, checkResult: (prog: Program, host: Utils.MockProjectReferenceCompilerHost) => void) {
         const files = createMap<string>();
         for (const key in spec) {
             const sp = spec[key];
@@ -81,7 +81,7 @@ namespace ts {
         const file = ts.parseJsonConfigFileContent(config, host.configHost, getDirectoryPath(entryPointConfigFileName), {}, entryPointConfigFileName);
         file.options.configFilePath = entryPointConfigFileName;
         const prog = ts.createProgram(file.fileNames, file.options, host);
-        checkResult(prog);
+        checkResult(prog, host);
     }
 
     describe("project-references meta check", () => {
@@ -232,4 +232,26 @@ namespace ts {
             });
         });
     });
+
+    /**
+     * referenceTarget behavior
+     */
+    describe("project-references behavior changes under referenceTarget: true", () => {
+        it("doesn't infer the rootDir from source paths", () => {
+            const spec: TestSpecification = {
+                "/alpha": {
+                    files: { "/alpha/src/a.ts": "export const m: number = 3;" },
+                    options: {
+                        outDir: "bin"
+                    },
+                    references: []
+                }
+            };
+            testProjectReferences(spec, "/alpha/tsconfig.json", (program, host) => {
+                program.emit();
+                assert.deepEqual(host.emittedFiles.map(e => e.fileName).sort(), ["/alpha/bin/src/a.d.ts", "/alpha/bin/src/a.js"]);
+            });
+        });
+    });
+
 }
diff --git a/src/harness/virtualFileSystem.ts b/src/harness/virtualFileSystem.ts
index b52a5730bf5..1e19efa303e 100644
--- a/src/harness/virtualFileSystem.ts
+++ b/src/harness/virtualFileSystem.ts
@@ -222,9 +222,16 @@ namespace Utils {
     }
 
     export class MockProjectReferenceCompilerHost implements ts.CompilerHost {
-        public configHost: ts.ParseConfigHost = new MockParseConfigHost(this.currentDirectory, this.ignoreCase, this.files);
+        public emittedFiles: {fileName: string, contents: string}[] = [];
+        public configHost: ts.ParseConfigHost;
         private readonly getCanonicalFileNameImpl = ts.createGetCanonicalFileName(!this.ignoreCase);
         constructor(private currentDirectory: string, private ignoreCase: boolean, private files: ts.Map<string> | string[]) {
+            this.reset();
+        }
+
+        reset() {
+            this.configHost = new MockParseConfigHost(this.currentDirectory, this.ignoreCase, this.files);
+            this.emittedFiles = [];
         }
 
         getCanonicalFileName = (fileName: string): string => {
@@ -269,7 +276,11 @@ namespace Utils {
         getDefaultLibFileName(options: ts.CompilerOptions): string {
             return ts.getDefaultLibFileName(options);
         }
-        writeFile: ts.WriteFileCallback;
+
+        writeFile: ts.WriteFileCallback = (fileName, contents) => {
+            this.emittedFiles.push({ fileName, contents });
+        }
+
         getCurrentDirectory = (): string => {
             return this.currentDirectory;
         }