MANAGEMENT CONTROL SYSTEMS
Abernethy et al. (2013). The Role of Performance Measures in the
Intertemporal Decisions of Business Unit Managers
What is the main research question? What is the practical problem that the author starts from?
We examine the impact of specific performance measures, used in contracting with business unit
managers, on the allocation of effort between actions with a short-term and with a long-term time
horizon. Research question: do accounting measures result in managerial myopia? (and does it
depend on the choice of the measure?)
Accounting researchers have usually concluded that all accounting-based measures distort the attention
of managers by overweighting the short run (Merchant 1989, 1990; Chow, Kato, and Merchant 1996;
Van der Stede 2000).
Problem: Why accounting performance measures continue to be used in contracting if they do not
provide business unit managers with incentives to make value-maximizing decisions and to refrain from
making intertemporal choices that dissipate wealth.
What are the exact issues of the paper? What theories does the author use to derive his hypotheses?
Issues:
1) We argue that the use of accounting return measures signals to the manager that senior
management cares about investment returns. Our focus is more broadly on any kind of managerial
action with long-term impact. Previous literature is about how accounting return measures motivate
long-term investments.
2) It is unclear to what extent nonfinancial measures deliver improvements in practice; indeed, it is
likely that the efficacy of these measures varies by type and by organizational setting. Findings
suggest that the close link between nonfinancial measures and senior management’s
conceptualization of the underlying business process “brings the future forward”.
3) How sensitive are intertemporal decisions to accounting return and nonfinancial measures? Four
potential problems with nonfinancial measures to support this argument: (a) incongruity, (b) lead
times that do not extend beyond the one-year horizon, (c) nonlinearity, and (d) nonverifiability. The
degree to which nonfinancial measures suffer from these problems will vary from firm to firm and,
more importantly, from one nonfinancial measure to another.
In sum, while nonfinancial measures can be useful in promoting actions with longer term impact by
providing a timely signal about the effect of an action on firm value, there is no guarantee that
improving performance based on a particular measure benefits firm value.
Theories to support the hypotheses (also see notes on the paper at the end of the summary):
Multi-action agency models – which lend themselves to interpretations of intertemporal choice and
emphasize the role of performance measures.
In a typical multitask agency problem, the agent’s allocation of effort over short- and long-run activities
follows directly from the compensation contract design choice of incentive weights placed on different
performance measures.
1
Abernethy et al. (2013). The Role of Performance Measures in the
Intertemporal Decisions of Business Unit Managers
What is the main research question? What is the practical problem that the author starts from?
We examine the impact of specific performance measures, used in contracting with business unit
managers, on the allocation of effort between actions with a short-term and with a long-term time
horizon. Research question: do accounting measures result in managerial myopia? (and does it
depend on the choice of the measure?)
Accounting researchers have usually concluded that all accounting-based measures distort the attention
of managers by overweighting the short run (Merchant 1989, 1990; Chow, Kato, and Merchant 1996;
Van der Stede 2000).
Problem: Why accounting performance measures continue to be used in contracting if they do not
provide business unit managers with incentives to make value-maximizing decisions and to refrain from
making intertemporal choices that dissipate wealth.
What are the exact issues of the paper? What theories does the author use to derive his hypotheses?
Issues:
1) We argue that the use of accounting return measures signals to the manager that senior
management cares about investment returns. Our focus is more broadly on any kind of managerial
action with long-term impact. Previous literature is about how accounting return measures motivate
long-term investments.
2) It is unclear to what extent nonfinancial measures deliver improvements in practice; indeed, it is
likely that the efficacy of these measures varies by type and by organizational setting. Findings
suggest that the close link between nonfinancial measures and senior management’s
conceptualization of the underlying business process “brings the future forward”.
3) How sensitive are intertemporal decisions to accounting return and nonfinancial measures? Four
potential problems with nonfinancial measures to support this argument: (a) incongruity, (b) lead
times that do not extend beyond the one-year horizon, (c) nonlinearity, and (d) nonverifiability. The
degree to which nonfinancial measures suffer from these problems will vary from firm to firm and,
more importantly, from one nonfinancial measure to another.
In sum, while nonfinancial measures can be useful in promoting actions with longer term impact by
providing a timely signal about the effect of an action on firm value, there is no guarantee that
improving performance based on a particular measure benefits firm value.
Theories to support the hypotheses (also see notes on the paper at the end of the summary):
Multi-action agency models – which lend themselves to interpretations of intertemporal choice and
emphasize the role of performance measures.
In a typical multitask agency problem, the agent’s allocation of effort over short- and long-run activities
follows directly from the compensation contract design choice of incentive weights placed on different
performance measures.
1
