The effects of tolerance for ambiguity and uncertainty on the appropriateness of accounting performance measures

This article examines how task uncertainty, environmental uncertainty and tolerance for ambiguity (TFA) affect managerial opinions about the appropriateness of accounting performance measures (APM). Based on accounting and psychology literature, this study argues that task uncertainty and environmental uncertainty differ in their direct effects on the appropriateness of APM, and furthermore that the relationship between uncertainty and the appropriateness of APM is moderated by managers' TFA. Hypotheses are developed, and tested with data from a survey study among 250 managers in eleven organizations, using partial least squares (PLS). Overall, the results show that the two types of uncertainty have opposite effects on managers' opinions about the appropriateness of APM, and that these effects are moderated by TFA, which confirms expectations. No direct effect of TFA on the appropriateness of APM was found. Overall, these findings provide an explanation of the inconsistencies in the extant behavioural management accounting literature that has addressed the appropriateness of APM under uncertainty.     

Fairness in performance evaluation and its behavioural consequences

A recent paper in Accounting and Business Research by Lau et al. (2008) offers systematic evidence to explain whether managers’ perceptions on fairness of performance evaluation procedures affect attitudes such as job satisfaction; and if it does, the different behavioural processes involved. Our paper re‐examines Lau et al.’s model and hypotheses to assess the external validity of their findings, based on a very different sample of managers. Drawing on recent organisational justice literature, it further develops the model and examines the potential interaction effects of fairness of performance evaluation procedures and other variables on job satisfaction. Finally, it extends the outcome variable to include manager performance. Using survey responses from 165 managers, supported by 24 interviews, drawn from three major organisations in the manufacturing and financial services sectors, we find that Lau et al.’s results on the indirect effects of fairness of performance evaluation procedures on job satisfaction are generalisable to other organisational settings and managerial levels. However, using their model we do not find support for the outcome‐based effects through distributive fairness. Developing a revised model we observe that the effects of distributive fairness on job satisfaction are indirect via organisational commitment. When the model is further developed to incorporate performance as the outcome variable, we observe similar findings.     

The influence of strategy map communications and individual differences on multidimensional performance evaluations

Multidimensional performance evaluation systems such as the Balanced Scorecard (BSC) were developed to overcome the documented tendency of managers to focus almost exclusively on short-term financial performance measures while disregarding or de-emphasising other short-term and/or long-term non-financial performance measures. Evidence suggests, however, that implementation of many of these systems has not achieved desired outcomes. Cogent communication of a corporation's goals and management's strategy to achieve those goals can be expected to influence employee ‘buy-in’ and the subsequent use or resistance to multidimensional performance measures. In this study we examine the role of strategy maps in communicating goals and strategy. We also examine individual differences (tolerance of ambiguity and functional background) that we believe also influence individuals to be more (or less) receptive to the guidance of strategy maps. An experiment was conducted with 165 experienced professionals enrolled in MBA programmes in Spain and the US. Our experimental results indicate that a strategy map reflecting integrated dependencies can de-bias evaluations of certain groups of individuals, who have high tolerance for ambiguity and have a financial work background. Implications and suggestions for future research are also provided.     

Application of the controllability principle and managerial performance: The role of role perceptions

The controllability principle stipulates that the evaluation of a manager should be based only on elements that are under the manager's control. Arguments for and against its application are theoretically well understood, but empirical evidence based on the evaluation of the perceptions of managers and their implications for managerial performance is scarce. By empirically analyzing the effects on managerial performance, this paper explores managers’ responses to the application of the controllability principle. We draw on role theory and analyze how role ambiguity and role conflict mediate this basic relationship. Moreover, we test whether application of the controllability principle equally affects role perceptions of top-level managers and those of lower and middle-level managers. Empirical analysis of survey responses from 440 managers reveals that role perceptions completely mediate the effect of application of the controllability principle on managerial performance. This effect is insignificant in the group of top-level managers, who appear to cope with uncontrollable factors more effectively.     

Procedural justice in managerial performance evaluation: Effects of subjectivity,relationship quality,and voice opportunity

This study investigates the effect of subjectivity in performance evaluation on managerial perceptions of procedural justice. Using survey data from a sample of 317 managers, we examine two forms of subjectivity: use and weight of subjective performance measures and ex post flexibility in the weighting of multiple performance measures. We also examine the interaction effects of two contextual factors, superior–manager relationship quality and voice opportunity, on the association between subjectivity and perceived procedural justice. The results suggest that only the superior's use of ex post flexibility in weighting multiple performance measures adversely affects managers' perceptions of procedural justice. Moreover, superior–manager relationship quality reduces the negative effects of ex post flexibility in weighting multiple performance measures on procedural justice, whereas voice opportunity amplifies this negative effect. These findings have practical and theoretical implications, as they shed new light on the trade-off between the informative benefits and perceived unfairness of incorporating subjectivity into performance evaluation.     

The use of performance measurement systems in the public sector: Effects on performance

We study the use of performance measurement systems in the public sector. We hypothesize that the way in which these systems are being used affects organizational performance, and that these performance effects depend on contractibility. Contractibility encompasses clarity of goals, the ability to select undistorted performance metrics, and the degree to which managers know and control the transformation process. We expect that public sector organizations that use their performance measurement systems in ways that match the characteristics of their activities outperform those that fail to achieve such fit. We test our hypotheses using survey data from 101 public sector organizations. Our findings indicate that contractibility moderates the relationship between the incentive-oriented use of the performance measurement system and performance. Using the performance measurement system for incentive purposes negatively influences organizational performance, but this effect is less severe when contractibility is high. We also find that an exploratory use of the performance measurement system tends to enhance performance; this positive effect is independent of the level of contractibility. The effectiveness of the introduction of performance measurement systems in public sector organizations thus depends both on contractibility and on how the system is being used by managers. These findings have important implications, both for practice and for public policy.     

THE INTERVENING EFFECTS OF PARTICIPATION ON THE RELATIONSHIP BETWEEN PROCEDURAL JUSTICE AND MANAGERIAL PERFORMANCE

Prior studies have suggested that the subordinates’ perception of fairness in their organizations’ procedures is related to improvements in the subordinates’ performance. However, the positive relationship between perception of justice and performance may not be a direct one, but is indirect via the intervening variable of participation. It is likely that the importance of maintaining procedural fairness in the organization will lead senior managers (superiors) to select procedures that allow their subordinates more participation privileges in the organization’s affairs because high participative procedures are perceived to be fair. This increase in participation, in turn, is likely to improve the subordinates’ performance. The results, based on a path analytical model and a sample of 83 senior managers, indicate that procedural justice has an indirect effect on performance via participation. On the basis of these results, it is possible to conclude that the importance of procedural fairness in the organization leads to the selection of procedures with high subordinates’ participation, which, in turn, leads to high managerial performance.     

Assessing the Performance of Business Unit Managers

Using a sample of 140 managers, we investigate the use of various performance metrics in determining the periodic assessment, bonus decisions, and career paths of business unit managers. We show that the weight on accounting return measures is associated with the authority of these managers, and we document that both disaggregated measures (expenses and revenues), and nonfinancial measures play a greater role as interdependencies between business units increase. The results suggest separate and distinct roles for different types of performance measures. Accounting return measures are used to create the proper incentives for managers with greater authority, while disaggregated and nonfinancial measures are employed in response to interdependencies.     

Validation of default probability models: A stress testing approach

This study aims to evaluate the techniques used for the validation of default probability (DP) models. By generating simulated stress data, we build ideal conditions to assess the adequacy of the metrics in different stress scenarios. In addition, we empirically analyze the evaluation metrics using the information on 30,686 delisted US public companies as a proxy of default. Using simulated data, we find that entropy based metrics such as measure M are more sensitive to changes in the characteristics of distributions of credit scores. The empirical sub-samples stress test data show that AUROC is the metric most sensitive to changes in market conditions, being followed by measure M. Our results can help risk managers to make rapid decisions regarding the validation of risk models in different scenarios.     

The Role of Visual Attention in the Managerial Judgment of Balanced‐Scorecard Performance Evaluation: Insights from Using an Eye‐Tracking Device

This paper investigates the role of visual attention in managerial judgments during balanced‐scorecard performance evaluations. Using the Locarna eye tracker to establish the amount of time managers spent focused on visual cues, we found that managers who look more at strategically linked performance measures are more likely to make decisions consistent with the achievement of their subordinates’ strategic objectives. When aware of strategy, managers focused more on strategically linked performance measures than on nonlinked measures. The presentation format of the strategy information did not significantly affect this focus. Our findings indicate that awareness of strategically linked performance measures, but not their presentation, appears to be important in helping managers to make better decisions. This study contributes to the management accounting literature by generating useful insights into the impact of visual attention on judgments and decision‐making processes.     

Can Auditors Predict the Choices Made by Other Auditors?

An implicit assumption of prior literature on strategic behavior of auditors is that auditors know the preferences of their colleagues. In this study, we conduct an experiment to investigate the validity of this assumption. In our experiment, we match a manager with a pair of top and mediocre audit seniors, as assessed by their firm. Each auditor predicts the choices that will be made by other auditors on two tasks that differ in their level of ambiguity. Our results show no difference in the accuracy among managers, top seniors, and mediocre seniors when they predict the choices made by specific individual auditors for both tasks. When predicting the number of managers and seniors who will choose a specific option on the high-ambiguity task, managers outperform top seniors, who in turn outperform mediocre seniors. For the low-ambiguity task, we find no difference among managers, top seniors, and mediocre seniors. Our results provide some limited support for models of strategic auditor behavior, and indicate that the ability to predict the choices of others is a dimension of an auditor's expertise.     

TESTING THE CONTINGENCY «FIT» BETWEEN MANAGEMENT ACCOUNTING SYSTEMS AND MANAGERIAL PERFORMANCE: A RESEARCH NOTE ON THE MODERATING ROLE OF TOLERANCE FOR AMBIGUITY

This study examines the moderating effect of tolerance for ambiguity, a personality variable, on the relation between management accounting systems (MAS) design and managerial performance. MAS design was defined in terms of the extent to which managers» use of broad scope MAS information for managerial decision making. The responses of 63 managers, drawn from a cross-section of Australian manufacturing companies, to a questionnaire survey were analysed by using a multiple regression technique. The results indicate that the use of broad scope MAS information interact with tolerance for ambiguity to affect managerial performance. The results indicate that an appropriate «fit» between manager's personality variable of tolerance for ambiguity and the extent of use of broad scope MAS information for managerial decisions will lead to improved managerial performance.     

The judgmental effects of strategy maps in balanced scorecard performance evaluations

We examine whether supplemental information displays affect decisions made using a common strategic performance measurement system, the balanced scorecard. A distinguishing feature of the balanced scorecard (BSC) is the number and diversity of its metrics. To effectively formulate a decision from such a complex information set, managers must view these measures within their strategic context ( [Kaplan and Norton, 1993] and [Kaplan and Norton, 1996] ). However, academic studies indicate that problems in communication and comprehension of the strategic logic underlying the scorecard hinder its implementation and use ( [Lipe and Salterio, 2000] , [Malina and Selto, 2001] , [Ittner et al., 2003a] and [Ittner et al., 2003b] ). We investigate whether a supplemental information display, in the form of a strategy map, results in performance evaluation judgments consistent with the recognition of relations between performance metrics and strategy. Strategy maps are causal diagrams depicting temporally-separate and non-linear relations between scorecard performance measures and overriding strategic objectives. As predicted, we find that performance evaluation decisions are more consistent with the achievement of strategic objectives when participants are provided with strategy maps.     

Management accounting systems, task uncertainty and managerial performance: A research note

This study examines the interactive effects of management accounting systems (MAS) design and task uncertainty on managerial performance. MAS design was defined in terms of the extent to which managers use broad scope MAS information. The responses of 42 managers, drawn from a cross-section of Australian manufacturing companies, to a questionnaire survey were analysed by using a multiple regression technique. The results showed that under a high task uncertainty situation, the extent of use of broad scope MAS information led to effective managerial decisions and hence to improved managerial performance. On the other hand, under low task uncertainty situations, the extent of use of broad scope MAS information led to information overload which was dysfunctional to managerial performance.     

Home-field advantage or a matter of ambiguity aversion? Local bias among German individual investors

This paper investigates whether familiarity induced by ambiguity aversion can help explaining the local bias phenomenon among individual investors. Using geographic closeness as a proxy for investor familiarity, we find that investors pull out of (unfamiliar) remote stocks and pour into (familiar) local stocks during times of increased market uncertainty. Moreover, the magnitude of this ‘flight to familiarity’ increases in the spread of an investor's ambiguity (about expected returns) between local and remote stocks. Our results prove robust to a number of alternative explanations of local bias. Specifically, we rule out a ‘home-field advantage’, where investors are able to translate information advantages about nearby companies into excess returns on their local stockholdings. We conclude that individual investors’ local bias is induced by ambiguity aversion in the portfolio selection process rather than a trading strategy based on superior information about local companies.     

任务不确定性对管理控制系统的影响及其作用机理——基于在中国国有大型铁路施工企业的实地研究

本研究通过在中国国有大型铁路施工企业的实地研究,通过深度访谈和定向调查两个阶段的递进研究,比较充分地探讨了任务不确定性对控制方式、进而对控制绩效的影响及其作用机理。研究表明:总体来看,建筑业有比较"模糊"的任务特征,各种控制方式都有不同程度的使用。具体而言,当面临"常规的"任务时,四种控制方式都对控制绩效有显著为正的影响;当任务不确定性较低(特别是例外事件少)时,正式的控制方式(行为控制和结果控制)对控制绩效有显著为正的影响;随着例外事件变多,非正式的控制方式(人员控制和过程控制)将产生更显著的效用。     

THE JOINT EFFECTS OF BUDGETARY SLACK AND TASK UNCERTAINTY ON SUBUNIT PERFORMANCE

Even though managers may build slack into their budgets to enhance their prospects for reward, the literature proposes that there may be circumstances when budgetary slack may be utilized by subunits to provide them with a degree of flexibility in responding effectively to changes in operating conditions. This suggests that the use to which budgetary slack is put, in contrast to any dysfunctional reason for its creation, may have implications for subunit performance particularly when task uncertainty is high. A theory was developed and an empirical assessment was conducted to evaluate whether slack moderates the relation between task uncertainty and subunit performance, paying specific attention to the effects of the task difficulty and task variability dimensions of task uncertainty. The results of the study suggest that slack has a positive role to play in Influencing the relation between task difficulty and subunit performance. There was no evidence, however, that slack and task variability jointly influence performance.     

The Performance Consequences of Operational Restructurings

This study provides new evidence on the long-term performance effects of operational restructurings. While managers claim that restructurings increase the efficiency and profitability of companies, prior studies using accounting data have reached mixed conclusions regarding the post-restructuring operational effectiveness of these events. Using metrics that provide control for firm and industry performance in the absence of restructuring, and examining a time horizon extending five years subsequent to the restructuring, our results are not consistent with an improvement in operating performance resulting from restructuring after controlling for ex ante expectations of firm and industry performance. JEL Classification: G340, M410     

Disentangling Managers’ and Analysts’ Non‐GAAP Reporting

Researchers frequently proxy for managers’ non‐GAAP disclosures using performance metrics available through analyst forecast data providers (FDPs), such as I/B/E/S. The extent to which FDP‐provided earnings are a valid proxy for managers’ non‐GAAP reporting, however, has been debated extensively. We explore this important question by creating the first large‐sample data set of managers’ non‐GAAP earnings disclosures, which we directly compare to I/B/E/S data. Although we find a substantial overlap between the two data sets, we also find that they differ in systematic ways because I/B/E/S (1) excludes managers’ lower quality non‐GAAP numbers and (2) sometimes provides higher quality non‐GAAP measures that managers do not explicitly disclose. Our results indicate that using I/B/E/S to identify managers’ non‐GAAP disclosures significantly underestimates the aggressiveness of their reporting choices. We encourage researchers interested in managers’ non‐GAAP reporting to use our newly available data set of manager‐disclosed non‐GAAP metrics because it more accurately captures managers’ reporting choices.