Enabling control and the problem of incomplete performance indicators

To which extent do managers care about the design characteristics of performance indicators and other control systems? The paper examines this question with the help of the framework of enabling and coercive control. Drawing upon data from a longitudinal field study in a manufacturing organisation, we study operational managers’ attitudes towards the incompleteness of performance indicators. Managers are likely to perceive performance indicators as enabling if the latter facilitate their actions without unduly constraining them. This is true even for incomplete performance indicators as long as managers can handle these indicators in a flexible way, treating them as means rather than ends when carrying out their work. Our case also shows, however, how a flexible use of indicators becomes more difficult to sustain once top management signals an increased importance of the indicators. Incompleteness then becomes a more pressing concern for managers. We illuminate the various forms of top management sense-giving through which such tightening of control is achieved and we show how they translate into managers’ perception of the control system as being a coercive rather than enabling one. Taken together, the findings of the present paper add to our understanding of enabling and coercive forms of control and also extend previous studies that have addressed the problem of incomplete accounting information.     

Implementation Guidance for Standards and Revenue Trend in Aggressive Reporting

This study examines the interactive effect of including the implementation guidance in accounting standards (with and without indicators) and different reported revenue trends (increasing, decreasing, and volatile) in aggressive reporting. For this purpose, we adopt a 2 × 3 between-subjects experiment. Aggressive reporting is measured by managers' perception of control and judgment regarding revenue recognition. The results of this experiment indicate that including the implementation guidance can constrain managers' revenue recognition judgments. The results show that for decreasing revenue trends, the inclusion of indicators for implementation does not influences managers' judgments regarding revenue recognition. For increasing revenue trends, the inclusion of guidance indicators matters in that the managers' judgments regarding revenue recognition are more aggressive in conditions without indicators than in conditions with indicators. The findings of this study extend the literature on implementation guidance in accounting standards and aggressive reporting.     

Associations between strategic resource importance and performance measure use: The impact on firm performance

This study investigates the relation between managers’ perception of the importance of several types of performance measures and managers’ assessment about the importance of the firm's strategic resources that sustains its competitive advantage. Furthermore, it investigates whether there is a significant association between the importance of performance measures and firm performance, and thus, whether performance measures are mediating variables in the relation between the importance of strategic resources and performance. Using survey data from 107 companies, the results indicate that managers place importance on multiple measures and show some evidence that the importance of performance measures mediates the association between the importance of strategic resources and performance. Implications and insights are discussed, along with ideas for future research.     

The decision-influencing use of performance measurement systems in relationships between headquarters and subsidiaries

Although theoretical frameworks assume that performance measurement systems (PMS) can be employed for different uses, there is a lack of prior empirical research examining the use of PMS. In addition, recent International Business studies reveal many unresolved issues about the use of PMS to manage relationships between headquarters and subsidiaries. After summarizing the evolution of the use of PMS over three International Business eras, we focus on the decision-influencing use of PMS, operationalized as the influence of the PMS implemented by headquarters on subsidiaries’ decisions. Based on International Business literature and Management Accounting research, we hypothesize that the subsidiary participation in PMS design, measurement diversity in PMS structure, the linking of PMS to reward, as well as headquarters’ national culture, subsidiary size, and global pressure affect the influence of PMS on subsidiaries’ decisions. We collected data through questionnaires emailed to 100 subsidiaries. Findings show that PMS have a greater influence on decisions in cases of higher subsidiary's participation in PMS design, headquarters’ cultural tolerance for uncertainty, subsidiary size, and global pressure. Contrary to what is contended by advocates of multidimensional approaches to PMS, measurement diversity and the linking of PMS to reward mechanisms do not have a significant impact on the decision-influencing use. We discuss the empirical evidence providing qualitative arguments derived from a focus group, which reveals the existence of a PMS decoupling and helped us to describe four situations with different levels of decision-influencing use of PMS and different economic performance results. The presented quantitative and qualitative empirical evidence offers several insights for research on PMS within multinational companies.     

Top Management Team Characteristics and Accrual-Based Earnings Management

This study examines how top management team (TMT) knowledge and average tenure affect accrual-based earnings management by investigating 4791 Taiwanese listed companies from 2006 to 2010. TMT members with more knowledge (higher education level, more accounting expertise, and greater prior top management experience) and longer average tenure have better performances and higher reputations, and are more aware of the litigation costs of earnings manipulations; therefore, they reduce managers' incentives to manage earnings (incentive-reduction effect). On the other hand, these TMT members are also likely to become entrenched and engage in more earnings manipulations (entrenchment-enhancing effect). The empirical results show that firms' TMT knowledge and average tenure are negatively associated with discretionary accruals, suggesting that the incentive-reduction effect is stronger than the entrenchment-enhancing effect, which makes TMT members less likely to engage in earnings management. Moreover, the above results are robust when employing different earnings management measures and suspect firm analyses, as well as considering endogeneity issues. Finally, the study suggests that the presence of a founding family may reduce the influences of TMT knowledge and average tenure on earnings management.     

The effect of cost management knowledge on the relationship between budgetary participation and managerial performance

This study investigates the relationship between budget participation (BP), cost management knowledge and managerial performance. It draws on relevant previous research in the theory of work performance and accounting to formulate the research questions. Eighty-three managers from Finnish companies participated in the study. Data were collected from the managers using a mail questionnaire. The results indicate that managers’ cost management knowledge, and especially the balanced perspective of cost management knowledge, moderates the effect of BP on self-perception of managerial performance. It was specifically found that the effect of BP on perceived managerial performance becomes more positive when managers’ cost management knowledge increases. High perception of managerial performance is obtained when both the BP and managers’ cost management knowledge are high. Our results suggest that organizations should improve the cost management knowledge of managers who participate in the budgeting process.     

Economic consequences of firms’ depreciation method choice: Evidence from capital investments

This study identifies several interrelated reasons why firms’ depreciation method choice is likely to influence managers’ capital investment decisions. We find that firms that use accelerated depreciation make significantly larger capital investments than firms that use straight-line depreciation. Further, we find that there has been a migration away from accelerated depreciation to straight-line depreciation over the past two decades. Firms that make such accounting changes make smaller capital investments in the post-change periods than in the pre-change periods. These results suggest that a choice made for external financial reporting purposes influences managers’ capital investment decisions.     

Do investors value smooth performance?

This paper presents empirical evidence that cash-flow volatility is negatively valued by investors. The magnitude of the effect is substantial with a 1% increase in cash-flow volatility, resulting in approximately a 0.15% decrease in firm value. We show that this increase, however, is not associated with earnings smoothing resulting from managers’ accrual estimates. Our results are consistent with a preference by the market for less volatile cash flows and suggest that managers’ efforts to produce smooth financial statements add value, but only via the cash component of earnings.     

Developing performance-measurement systems as enabling formalization: A longitudinal field study of a logistics department

This paper reports on a developmental approach to performance-measurement systems (PMS). In particular, we look at characteristics of a development process that result in the PMS being perceived by employees as enabling of their work, rather than as primarily a control device for use by senior management. We will refer to such a PMS as “enabling PMS”. The theoretical part of the study builds on ideas of enabling versus coercive formalization [Adler, P. S., & Borys, B. (1996). Two types of bureaucracy: Enabling and coercive. Administrative Science Quarterly 41 (March), 61–89]; on notions of organizational learning (e.g., [Zollo, M., & Winter, S. G. (2002). Deliberate learning and the evolution of dynamic capabilities. Organization Science 13(3), 339–351]); and on awareness of the incompleteness of performance measures (e.g., [Chapman, C. S. (1997). Reflections on a contingent view of accounting. Accounting, Organizations and Society 22, 189–205; Lillis, A. M. (2002). Managing multiple dimensions of manufacturing performance—An exploratory study. Accounting, Organizations and Society 27, 497–529]). The empirical context entails a mixed-method, 3-year longitudinal study of the logistics department of a medium-sized company in the beverage manufacturing industry. Qualitative data were gathered through interviews, participation in meetings, action research, and review of company documents. We also analyzed two waves of quantitative survey data, gathered from a panel of 42 employees. We find that a development process that is experience-based contributes to the enabling nature of the PMS, as it builds on existing skills, local practices, and know-how on performance measurement to enrich the PMS step-by-step over time. Also, experimentation with specific performance measures was found to enhance the enabling nature of the PMS: testing, reviewing, and refinement of conceptualizations, definitions, data, and presentations of new performance measures. Professionalism was significantly related to positive attitude toward performance measures in our survey data. The results also illustrate that transparency of the PMS itself is key to enabling PMS.     

The effect of framing and negotiation partner’s objective on judgments about negotiated transfer prices

A common approach to set transfer prices is via intra-firm negotiation. However, Luft and Libby [Luft, J. L., & Libby, R. (1997). Profit comparisons, market prices and managers’ judgments about negotiated transfer prices. The Accounting Review, 72(2), 217–229] found that because of the existence of self-serving biases, negotiating managers have different expectations regarding what constitutes a ‘fair’ transfer price, leading to a less efficient negotiation process. In this study, we examine two factors that are expected to affect managers’ transfer price negotiation judgments, namely, framing as a gain or as a loss and the negotiation partner’s objective (whether the partner’s objective involves high or low concern-for-others). We propose that these two factors affect managers’ perceptions of the negotiation context, and thus the way they interpret the economic and social consequences of accounting information. Our results show that a loss frame (compared to a gain frame) exacerbates managers’ self-serving biases and increases the ‘transfer price expectation gap’ between buyers and sellers. Further, in our experiment where market price is higher than equal-profit price, we find that managers’ transfer price expectations are lower (and deviate more from the prevailing market price) when they are negotiating with a partner with high concern-for-others than with a partner with low concern-for-others. We discuss the broader implications of these results for the design of management accounting systems.     

The relation between cost-system design, managers’ evaluations of the relevance and usefulness of cost data, and financial performance: an empirical study of US hospitals

This study examines the association between cost-system functionality, managers’ beliefs about the relevance and usefulness of cost data, and actual financial performance using a sample of 277 US hospitals. Results indicate that managers’ evaluations of the relevance and usefulness of cost data are positively correlated with the extent to which systems can provide greater cost detail, better classify costs according to behavior, and report cost information more frequently. However, only the ability to supply cost detail is favorably associated with measures of financial performance, including operating margin, cash flow, and administrative expense. Interestingly, cost-system design was not associated with operating expense per admission, suggesting that accounting information had not yet been successfully used to manage clinical costs.     

会计制度不完全性的经济学分析

本文从制度经济学的角度对会计制度不完全性进行了分析 ,认为会计制度安排作为一种不完全合约 ,无论是在发达的市场经济国家 ,还是在转轨时期不完善的市场经济国家 ,会计制度的不完全性是客观存在的 ;此外 ,会计环境的复杂性、未来的不确定性及相关法规制度的不完善是会计制度不完全性的外在诱因。本文在分析我国经济转型期会计制度不完全性原因的基础上 ,提出完善我国会计制度的政策建议     

The argument for more future-oriented planning

Planning, and practically all forms of decisionmaking, are concerned with the future. The future, unless we adopt deterministic philosophies, is uncertain and therefore difficult to plan for. Through the processes of change it is likely to be different from the past; existing and past knowledge and experience are only a partial guide to decisionmaking. The inclusion of a future dimension based on careful thought about possible future development offers a new tool to the decisionmaker that should not be overlooked.     

An empirical evaluation of the rationality of eurocurrency market expectations

This paper is concerned with testing the rationality of the Eurocurrency market's expectations of future spot rates. Whereas most previous studies have concentrated on analyzing spot rates, we develop and test an observable expectations series. The results show that although two of the three expectations series examined are unbiased, all three series ignore information readily obtainable from past spot rates.     

The growing role of informal controls: does organization learning empower or subjugate workers?

Several management theorists have called for organizations to incorporate organization learning, empowerment, open-book management, and similar initiatives to generate better value from an important strategic resource: employees. What does this mean for the controlled? Do extensions of the management control system’s ability to implement the strategy of the firm offer workers a more central role in creating their future? Or is this “progress" just another means to extract extra effort from workers for the benefit of owners? This paper is developed in two parts. The first argues that seeking better value from workers is here to stay, and that the implications for management control system bear consideration. In particular, the five disciplines of Senge’s (1990) Organization Learning are introduced to illustrate growing ways informal controls enhance workers’ knowledge contributions. The second half of the paper examines implications of this increasing control. Some argue that it is naive to expect organization learning will lead managers to willingly realign existing lopsided rewards. However, as a natural response to change, these controls are themselves dynamic and evolutionary. This paper suggests that the growing dependence on employee’s superior knowledge recalibrates power arrangements. Further there is a growing awareness that many managers’ self-interest is mitigated by their sense of fairness. Consequently, an increasingly shared authority combined with the self-reflection and transparency of organization learning raises the possibility of an environment where those who perform the work share more equally in its rewards.     

Search for information and portfolio selection

The paper examines the problem of how to allocate scarce resources between increasing the investor's knowledge, that is reducing his uncertainty, and the actual investment—that is a kind of an ex ante decision before the final parameters of the securities are known. Our model provides answers to questions of how the search for knowledge affects portfolio selection, to what extent additional information can improve estimates of securities' statistical parameters and how the benefits and costs of additional search alter the investor's efficient mean-variance portfolio set.     

A note on work-related values, budget emphasis and managers’ organisational commitment

Managers’ work-related values (WRVs) have important implications for designing appropriate management accounting systems (MAS) in organisations. This paper examines the effect of the interaction between managers’ WRV for innovation and budget emphasis (an integral part of MAS) on their organisational commitment. The sample consisted of 109 managers from production, marketing and support departments within Australian manufacturing firms. Hypotheses were tested using both quantitative and qualitative data collected by a questionnaire survey and post-survey interviews. The results indicate that the adoption of low budget emphasis led to high organisational commitment when managers’ WRV for innovation was high, but not when managers’ WRV for innovation was low. The results also indicate that marketing managers held higher WRV for innovation than production managers. The post-survey interviews provide further insight into how a more customer- and competitor-focused subculture of marketing managers and a more technical- and efficiency-focused subculture of production managers may promote the difference in their WRV for innovation, and affect their attitudes towards budget emphasis. The findings of the study have implications for design of performance evaluation systems for managers in functionally differentiated organisations.     

Conflicting interests but filtered key targets: Stakeholder and resource-dependency analyses at a University of Applied Sciences

Stakeholder theory (SHT) emphasizes that different stakeholders and their interests need to be identified and addressed to maximize firm performance. This emphasis can make the design of performance measurement systems (PMS) challenging because the interests of stakeholders are often in conflict. Based on previous research and using stakeholder and resource dependency theories, we develop a theoretical model suggesting that resource dependency acts as a “filter” in selecting which of the PMS design measures are emphasized for decision making. We find various conflicting interests between stakeholders in our case organization (a unit of University of Applied Sciences in Finland) that affected PMS design. Contrary to the earlier studies, however, we found that despite conflicting interests, all of the different stakeholders considered one nonfinancial indicator to be the most important: attractiveness, or the number of applicants divided by number of new students. As suggested by resource-dependency theory (RDT), the stakeholder providing the most resources had the most significant impact on the selection of the key performance indicators used. The key resource provider may also have had some effect on the expectations of other stakeholders.     

A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory

Testing the two-parameter asset pricing theory is difficult (and currently infeasible). Due to a mathematical equivalence between the individual return/‘beta’ linearity relation and the market portfolio's mean-variance efficiency, any valid test presupposes complete knowledge of the true market portfolio's composition. This implies, inter alia, that every individual asset must be included in a correct test. Errors of inference inducible by incomplete tests are discussed and some ambiguities in published tests are explained.     

Managing the information revolution : Lessons for business from the French Revolution

This article looks back to the French Revolution and forward to the next stages of the information revolution. It observes that the ‘managers’ of the French Revolution failed, first, to see what to do about the revolution's core issues; second, to properly manage the changes that were started; third, to manage expectations; and fourth, to provide committed and sustained leadership. Avoiding these four failures is also critical to managing the information revolution. But the new capabilities of information and communications technology are making it easier to do this. In their future strategy, top management need no longer be inhibited by ignorance of IT capabilities. Managing change can now be based on clearly differentiated roles of business and technical management. And, as understanding grows of the inherent uncertainties of system design, managing user expectations can become more effective.