Journal of Business Finance & Accounting
, 34(1) & (2), 111–138, January/March 2007, 0306-686Xdoi: 10.1111/j.1468-5957.2006.00660.x
Corporate Financial Control Mechanismsand Firm Performance: The Case of Value-Based Management Systems
Harley E. Ryan
and Emery A. Trahan
We examine the performance of 84 firms that adopt value-based management (VBM)systems during the period 1984-1997. The typical firm significantly improves matched-firm-adjusted residual income after adopting VBM. This improvement persists for the five post-adoption years studied. After controlling for possible sample bias, we find that large firms showless improvement than small firms. We find a negative relation between tying compensationto VBM and post-adoption performance. We also find that firms reduce capital expendituresfollowing VBM adoption, but that the reductions in spending do not differ based on the firms’growthopportunities.Overall,theevidencesuggeststhatVBMimproveseconomicperformanceand the efficient use of capital.
value-based management, residual income, management compensation, corporategovernance
Effective corporate governance and financial control includes the use of monitoringand incentive mechanisms to align divergent interests between shareholders andmanagers and encourage the creation of shareholder value. Value-based management systems(VBM)provideanintegratedmanagementstrategyandfinancialcontrolsystemintended to increase shareholder value by mitigating agency conflicts. In concept, VBM reduces agency conflicts and helps create shareholder value since it reveals value-increasingdecisionstoemployees,allowsforeasiermonitoringofmanagers’decisions,and provides a method to tie compensation to outcomes that create shareholder value.
TheauthorsarerespectivelyfromRobinsonCollegeofBusiness,GeorgiaStateUniversityandtheCollegeof Business Administration, Northeastern University, USA. They appreciate helpful comments from OlubunmiFaleye,SherryJarrell,ShaneJohnson,JayantKale,OmeshKini,JohnMartin,SheilaRyan,JamesWallace,Sam Weaver, J. Fred Weston, Roy Wiggins, the Editor (Pete Pope) and an anonymous referee. They acknowledgethe excellent research assistance of Pingshun Huang, Huihua Li, Roy Song and Lingling Wang. The authorsareresponsibleforanyremainingerrors.(PaperreceivedAugust2005,revisedversionacceptedAugust2006.Online publication December 2006)
EmeryA.Trahan,NortheasternUniversity,CollegeofBusinessAdministration,Finance Group, 413 Hayden Hall, Boston, MA 02115, USA.e-mail: email@example.com
2006 The Authors Journal compilation
2006 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.