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Source: The Accounting Review, Vol. 79, No. 3 (Jul., 2004), pp. 545-570

Published by: American Accounting Association

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THE ACCOUNTING REVIEW

Vol.

79,

No. 3

2004

pp.

545-570

Determinants of Control

S y stem Desig n

in Divisionalized F irms

Marg aret

A.

Abernethy

University of

Melbourne

Jan

Bouwens

Ny enrode University

Laurence van Lent

Tilburg University

ABS TRACT: We

investig ate

two determinants of two choices in the control

sy stem

of

divisionalized

f irms, namely

decentralization and use of

perf ormance

measures. The

two determinants are those identif ied in the literature as

important

to control

sy stem

desig n: (1)

inf ormation

asy mmetries

between

corporate

and divisional

manag ers

and

(2)

division

interdependencies.

We treat decentralization and

perf ormance

measure-

ment choices as

endog enous

variables and examine the interrelation

among

these

choices

using

a simultaneous

equation

model.

Using

data f rom78

divisions,

our results

indicate that decentralization is

positively

related to the level of inf ormation

asy mme-

tries and

neg atively

to intraf irm

interdependencies,

while the use of

perf ormance

mea-

sures is af f ected

by

the level of

interdependencies among

divisions within the

f irm,

but

not

by

inf ormation

asy mmetries.

We f ind some evidence that decentralization choice

and use of

perf ormance

measures are

complementary .

Key words: org anization desig n;

control

sy stem; interdependencies;

inf ormation

asy m-

metry ; perf ormance

measures.

JEL Classif ication:

D23; D82; L22; M12;

M4.

I. INTRODUCTION

Aconsiderable

body

of research exists on the use of

perf ormance

measurement

sy s-

tems

(Ittner

and Larcker

2001;

Luf t and S hields

2003). However,

there are f ew

attempts

to understand the relation between the use of these

perf ormance

measures

and other control choices. We

provide

evidence on this relation

by examining

two choices

We thank Willem

Buijink,

Peter

Easton,

Chris

Ittner, Ranjani Krishnan,

Christian

Leuz,

Anne

Lillis,

Venky Nag ar,

David

Otley ,

Mark

Penno,

F rank

S elto,

Peter

Wy socki,

and

workshop participants

at the Universities of

Melbourne,

Ny enrode,

New S outh Wales

(S y dney ),

and

Tilburg

f or

helpf ul

comments. The authors also benef itedf rom

sug -

g estions during

the 2001 EAA annual

meeting

in

Athens,

andthe 2002 AAA

Manag ement Accounting

S ection

meeting .

The editor and ref erees of The

Accounting

Review have

provided

most constructive comments on the

paper.

This

study

was

supportedby g rants

f romthe NIVRA andthe Australian Research Council.

Editor's note: This

paper

was

acceptedby Terry S hevlin,

S enior Editor.

S ubmitted

Aug ust

2002

Accepted

December 2003

545

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Abernethy ,

Bouwens,

and van Lent

made

by corporate manag ement

in the control

sy stem

of divisionalized f irms:

(1)

decen-

tralization and

(2)

use of divisional

summary perf ormance

measures. Decentralization oc-

curs when

corporate manag ement assig ns

decision

rig hts

to lower-level

manag ers.

We

op-

erationalize decentralization as the extent to which

decision-making authority

over

key

decisions is vested with divisional

manag ers (compared

with their

superiors).

Divisional

summary perf ormance

measures

(DS Ms)

have two

def ining

characteristics.

F irst,

they

sum-

marize the action choices of divisional

manag ers

into one

perf ormance

metric

(e.g ., prof it,

ROI) and, second,

they

measure

perf ormance

at the divisional level. Divisional

perf ormance

can also be measured

using specif ic, non-summary

metrics and f irm-level

summary

mea-

sures.

S pecif ic, non-summary

metrics

provide

inf ormation about

particular

activities carried

out within the division

(e.g ., quality

statistics or

delivery targ ets)

and theref ore do not ref lect

the overall

perf ormance

of a divisional

manag er,

while f irm-level

summary

measures

cap-

ture overall

f irmperf ormance

rather than divisional-level

perf ormance (e.g .,

f irmROI or

stock

price).

We

operationalize

the use of DS Ms as the

weig ht

these measures receive

relative to f irm-level

summary

measures and

specif ic, non-summary

measures when a su-

perior

assesses a division

manag er's perf ormance.

While a f irmmakes

multiple

control

choices,

we examine DS Ms and decentralization

choices f or several reasons.

F irst,

they

are considered two of the most

important desig n

choices made

by corporate manag ement

in divisionalized f irms

(Ittner

and Larcker

2001;

Luf t and S hields

2003;

Jensen and

Meckling 1992).' S econd,

the two choices are

tig htly

coupled.

Jensen

(2001) arg ues

that

corporate manag ement

will

only

decentralize when it

can

implement

a

perf ormance

measurement

sy stem

that

captures

the decision

rig hts

allo-

cated to divisional

manag ers.

DS Ms are

desig ned

to summarize the decisions over which

a divisional

manag er

has

responsibility . They provide corporate manag ement

with the

pos-

sibility

to assess the contribution of the division to f irmvalue and to determine if divisional

manag ers

are

using

decision

rig hts optimally (S olomons 1965;

Zimmerman

1997). F inally ,

we f ocus on

DS Ms,

as these measures are

present

in the

majority

of divisionalized f irms

(Vancil 1979;

Homg ren

et al.

1999).

Drawing

on

prior

literature,

we

predict

that decentralization and the use of DS Ms are

complementary

choices and that these choices are

jointly

determined

by : (1)

inf ormation

asy mmetries

between

corporate manag ement

and divisional

manag ers

and

(2) interdepen-

dencies

among

divisions. Our

study

contributes to the literature on the economics of or-

g anization desig n by extending

and

integ rating prior empirical

research

(Baiman

et al.

1995;

Bushman et al.

1995;

Keating

1997;

Nag ar 2002).

Earlier studies examined decentralization

in relation with

compensation sy stems,

but did not consider

perf ormance

measurement

issues

(e.g ., Nag ar

2002;

Baiman et al.

1995).

Those studies that f ocus on

perf ormance

measurement

sy stems

have either

ig nored

their relation with decentralization

(Keating 1997)

or have assumed decentralization to be

exog enously

determined

(Abernethy

and Lillis

2002;

Gordon and

Naray anan

1984;

Chenhall and Morris

1986).

Yet theoretical work

arg ues

that

the decentralization and

perf ormance

measurement are

complementary

control choices

made

by manag ement;

that

is,

they

are

endog enous (e.g ., Milg rom

and Roberts

1992).

To

Jensen and

Meckling (1992)

include incentive

sy stems

as the third

key

control choice.

Milg rom

andRoberts

(1992, 403), however,

do not make a distinction between incentive

sy stems

and

perf ormance

measurement

sy stems

as

they

consider

perf ormance

measurement

sy stems

as "the heart of

any

incentive

sy stem."

Our

approach

is consistent with

Milg rom

andRoberts

(1992) approach.

We f ocus on one

aspect

of incentive

sy stems, namely ,

perf ormance

measurement

sy stems,

while

Nag ar (2002)

and others f ocus on the variable

pay component

of

incentive

sy stems.

As

such,

our

study represents

a

partial equilibriumanaly sis

of decentralization and

perf orm-

ance measurement choices.

The

Accounting

Review, July 2004

546

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All use subject to JSTOR Terms and Conditions

Determinants

of

Control

S y stem

Desig n

in Divisionalized F irms

the best of our

knowledg e

this is the f irst

study

to examine the interrelation between

per-

f ormance measurement

sy stem

and decentralization choices. A second contribution is the

inclusion of both inf ormation

asy mmetry

and

interdependencies

into the model. While both

of these determinants have been identif ied as

important

in

prior

research

(Baiman

et al.

1995;

Bushman et al.

1995;

Keating 1997),

ours is the f irst

study

that has assessed their

joint

ef f ect on control

sy stem

choices.

The

study

also contributes

methodolog ically .

In recent

y ears

there has been serious

criticismnot

only

about the use of

inappropriate proxies

to

capture

theoretical

constructs,

but also about the lack of

consistency

between the levels of

theory , analy sis,

and measure-

ment

(Ittner

and Larcker

2001;

Luf t and S hields

2003;

Lanen

1995).

Consistent with our

hy potheses development,

we measure the constructs at the divisional level. We use either

prior

established

survey

instruments

or,

where

necessary , develop

measures to overcome

validity

concerns with available measures. We address concerns

relating

to

reliability

and

validity

of each of our constructs

by avoiding

the use of

"perceptive"

measures

(i.e.,

we ask

respondents

to

provide specif ic

data on

org anizational practices)

and

by collecting

additional data to test the construct

validity

of each of the constructs.

We examine the relation between decentralization and the use of DS Ms

using

a si-

multaneous

equation

model. This

approach

allows us to treat decentralization and the use

of DS Ms as control choices

(i.e.,

as

endog enous variables).

We

attempt

to reduce concerns

about the

endog eneity

of our main

independent

variables

(i.e., interdependencies

and in-

f ormation

asy mmetry ) by

our

sample

selection

procedures

and additional tests. We test our

model

using survey

data f roma

representative sample

of divisionalized f irms listed on the

AmsterdamS tock

Exchang e.

We choose divisionalized f irms because this enables us to

treat

interdependencies

as

exog enous.

The decision to create a divisionalized structure is

g enerally

considered to

precede

the

desig n

and

implementation

of a f irm's control

sy stem.

As

arg ued by Milg rom

and Roberts

(1992, 546-549)

f irms

initially

def ine divisions to

"minimize the connections

among

them" and to "avoid the need f or co-ordination across

divisional boundaries." Once the divisional structure is

implemented, however,

interdepen-

dencies will remain. Our interest is how these

interdependencies

are

manag ed throug h

org anizational desig n

choices. We also

explore

the ef f ect of

relaxing

the

exog eneity

as-

sumption

with

reg ard

to inf ormation

asy mmetry

and show that our

orig inal

results are

robust. The simultaneous

equation

model,

tog ether

with the

sample

selection

procedures,

beg ins

to address some of the

endog eneity

problems in manag ement

accounting

research.

However,

we

recog nize

that some

problems

are

likely

to remain and our results should be

interpreted according ly .

Our

f inding s

indicate that decentralization is

positively

related to the level of inf or-

mation

asy mmetries

and

neg atively

to intraf irm

interdependencies.

On the other

hand,

the

use of DS Ms is

only

af f ected

by

divisional

interdependencies.

We f ind some evidence that

the relation between decentralization choices and use of DS Ms is

complementary . Corporate

manag ement

relies more on DS Ms when

they

have

deleg ated authority

to divisions. On the

other

hand,

we f ind no evidence that a

g reater

use of DS Ms af f ects decentralization. The

f inding s presented

here allow us to increase our rather limited

understanding

of the

complex

interrelation between control choices as well as the context within which those choices are

made

(Luf t

and S hields

2003).

The remainder of this

paper

is structured as f ollows. S ection II

provides

the theoretical

basis f or the

empirical

model tested. We describe the data and research method in S ection

III,

and

present

the results of our tests in S ection IV. In S ection V we

provide

a

summary

and

concluding

remarks.

The

Accounting

Review,

July

2004

547

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Abernethy ,

Bouwens,

and van Lent

II. HYPOTHES IS DEVELOPMENT

Accounting

researchers have devoted considerable ef f ort to

establishing

the determi-

nants of the use of

perf ormance

measures

(Ittner

and Larcker

2001).

We

investig ate

the

f actors that inf luence the

importance placed

on

DS Ms,

as

opposed

to f irm-level

summary

measures

(e.g .,

f irm-wide

prof it)

or

specif ic, non-summary

measures

(e.g ., delivery targ ets).2

We are interested in the relation between decentralization choices and the use of DS Ms

by

corporate manag ement

f or

evaluating

divisional

manag ers.

We draw on

Milg rom

and

Roberts

(1992, 549)

and others

(Melumad

et al.

1992;

Ag hion

and Tirole

1997;

Jensen and

Meckling 1992)

to

arg ue

that

g ranting

decision

rig hts

and

using

DS Ms are

complementary

actions. We thus

expect

that the choice to decentralize and

corporate manag ement's

use of

DS Ms will be

jointly

determined and that the relation between the two will be

positive.

The

f ollowing

two

equations

summarize our

conceptual

model.

Divisional

summary

measures

(DS Ms)

=

f

(decentralization,

inf ormation

asy mmetry , interdependencies,

control

variables).

Decentralization = f

(DS Ms,

inf ormation

asy mmetry ,

interdependencies,

control

variables).

This model is used to assess the interrelations between decentralization and DS Ms and

to assess the

impact

of divisional

interdependencies

and inf ormation

asy mmetry

on these

choices. We

complete

the model

by including

a set of control variables in each

equation

based on

prior

literature.3 Theoretical

justif ication

f or the model f ollows.

Determinants of the Use of Divisional

S ummary

Measures

(DS Ms)

Decentralization

Corporate manag ement

decentralizes decision

making

to

encourag e

divisional

manag ers

to initiate and

implement

decisions that will increase f irmvalue. To avoid or

mitig ate

potential

control loss

problems, they

will

implement perf ormance

measures that both sum-

marize

perf ormance

into a metric and ref lect the decision

rig hts

allocated

(Jensen 2001;

Wruck and Jensen

1994).

Divisional

summary

measures

(DS Ms)

serve this

purpose. They

summarize

perf ormance

based on decision

rig hts deleg ated

to division

manag ers

and thus

provide

a means of

monitoring

their action choices. Ceteris

paribus,

DS Ms will be

pref erred

to other

perf ormance

metrics. F irm-level

summary

measures are too

noisy

because

they

are

not

only

af f ected

by

actions taken at the division

level,

but also

by

actions taken elsewhere

in the f irm

(Keating

1997;

Bushman et al.

1995). Using specif ic, non-summary

measures

to monitor divisional

manag ers ef f ectively

transf ers

authority

f romdivision

manag ers

to

corporate manag ement. Monitoring

divisional

perf ormance

on measures that ref lect

specif ic

activities of a division reduces the

authority

of division

manag ers

to make trade-of f s

among

these activities

necessary

to

optimize

overall divisional

perf ormance (Jensen 2001).

In this

sense,

specif ic, non-summary

measures are inconsistent with decentralized decision

making .

We thus

expect

that as decentralization

increases,

corporate manag ement

will

increasing ly

rely

on DS Ms to measure divisional

perf ormance.

2

Prior literature has assessed the relative

importance

of f irm

summary

measures versus divisional

summary

measures

(see Keating 1997)

anda number of studies have examinedthe trade-of f s between

summary

measures

(e.g ., prof it, ROI)

vis-a-vis other more detailednonf inancial measures

(e.g ., quality ,

turnaroundtimes, delivery

targ ets, etc.).

While these alternative measures are not the f ocus of our

study ,

we do undertake additional

analy sis

to assess the

impact

on f irm

summary

measures anddivisional

specif ic

measures when the use of DS Ms

chang es.

3 The choice of these control variables also enabledthe model to be identif iedas there was no reason to believe

theoretically

that the set of variables includedin each

equation

would be the same.

The

Accounting Review, July

2004

548

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All use subject to JSTOR Terms and Conditions

Determinants

of

Control

S y stemDesig n

in Divisionalized F irms

Inf ormation Asy mmetry

Inf ormation

asy mmetry

occurs when lower-level

manag ers

have

specif ic knowledg e

about the

f unctioning

of the division that is either not available to

corporate manag ement

or is too

costly

f or

corporate manag ement

to obtain

(Christie

et al.

2003).4

The use of

DS Ms

by corporate manag ement

assumes either that these measures

f ully capture

mana-

g erial perf ormance

or

top manag ement

has suf f icient

knowledg e

about the activities

per-

f ormed

by

divisions to allow f or the

incompleteness

of these measures and to detect

possible

manipulations

of the measures. There is some

support

that demonstrates the reluctance of

corporate manag ement

to

rely

on DS Ms when inf ormation

asy mmetry

exists between cor-

porate

and divisional

manag ement (Reichelstein 1992;

Dunk

1993;

Rockness and S hields

1984).

In this situation these esrse measures are

inadequate

measures of

manag erial

ef f orts and

their use will lead to

dy sf unctional

behavior

(Chow

et al.

1988).

We thus

expect

to observe

a

neg ative

relation between inf ormation

asy mmetry

and use of DS Ms.5

Interdependencies

Interdependencies

occur when demand f unctions of divisions are

dependent

or when

divisions have

joint supply

and cost f unctions

(see Milg rom

and Roberts

1992, 108-109,

113-116).

These

interdependencies

create a

perf ormance

measurement

problem

as

they

increase the "noisiness" of DS Ms. It is

only

in a

setting

where a f irmhas a "perf ect"

transf er-pricing sy stem

that the

impact

of intermediate

product

transf ers between divisions

will not inf luence the costs and revenues included in divisional

prof it

or ROI calculations

(Bushman

et al.

1995;

Keating

1997;

Lambert

2001).

There are two

ty pes

of

interdepen-

dencies

af f ecting

the use of DS Ms:

(1)

when the f ocal division is inf luenced

by

the activities

of other divisions and

(2)

when the f ocal division inf luences the

perf ormance

of other

divisions. As both

ty pes

of

interdependencies

increase,

the use of DS Ms will

decrease,

but

f or somewhat dif f erent reasons

(Lambert 2001;

Keating 1997).

When the f ocal division's

perf ormance

is inf luenced

by

the activities and decisions of other

divisions,

the measure is

"noisy "

and thus less inf ormative to

corporate manag ement.

The measure not

only captures

activities within the f ocal

division,

but it also

captures

actions of the other divisions. S im-

ilarly ,

if a f ocal division's actions and decisions inf luence the activities of another

division,

then the use of their own DS Ms will

encourag e

the

manag er

to take actions that will

optimize

his/her own

perf ormance,

rather than

encourag e cooperation

and

optimization

of

the

potential sy nerg ies among

the divisions.

We, theref ore,

expect

a

neg ative

relation be-

tween both

ty pes

of

interdependencies

and the use of DS Ms.

4 It is also

possible

that

corporate manag ement

has

specif ic knowledg e

that is not available to the division

manag er.

However,

this will not relate to the

operating

activities of the division. The inf ormation

asy mmetry

of concern

here is inf ormation

relating

to divisional activities.

5

Hig h

levels of inf ormation

asy mmetry

between

corporate

anddivisional

manag ement

will

require

the use of

alternative f orms of control. Control

throug h perf ormance

measurement is

unlikely

to be

completely

ef f ective

reg ardless

of the characteristics of the

perf ormance

measurement

sy stems. Corporate manag ement

will needto

resort to less obtrusive f orms of controls such as selection

procedures

and/or

training prog rams

as a means of

creating

a

corporate

culture that

encourag es employ ees

to behave in a manner consistent with

org anizational

g oals (Brickley

et al.

1997;

Kreps 1990).

The

Accounting Review,

July

2004

549

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Abernethy , Bouwens,

and van Lent

Control Variables:

Perf ormance

Measurement Characteristics

We control f or the ef f ects of the

properties

of DS Ms as

sug g ested by

Luf t and S hields

(2003).

We include two

perf ormance

measure

characteristics,

namely sensitivity

and

pre-

cision of the measure.6 Banker and Datar

(1989) arg ue

that the use of a

perf ormance

measure is

positively

related to the

sensitivity

of the measure to the action choices of a

manag er

and also

positively

to the

precision

of the measure. Datar et al.

(2001) question

whether

sensitivity

of a measure is an

important

determinant and demonstrate that the use

of a measure is inf luenced

by

its

importance

in

achieving org anizational objectives

(see

also,

Lambert

2001). Theref ore,

we do not make a

prediction

f or the

sig n

of

sensitivity ,

but

we

expect

that the use of DS Ms will be

positively

related to the

precision

of the measure.

Determinants of Decentralization

Use

of

Divisional

S ummary

Measures

(DS Ms)

There is

relatively strong

theoretical

support

in the literature that the use of DS Ms and

decentralization are

complementary

choices

(Melumad

et al.

1992;

Jensen

2001;

Ag hion

and Tirole

1997;

Milg rom

and Roberts

1995;

Jensen and

Meckling

1992). S olomons

(1965)

was one of the f irst to

arg ue

that decentralization is conditional on the use of

perf ormance

measures that

capture

the contribution of a division to f irmvalue

(see also,

Vancil 1979,

88).

DS Ms allow

corporate manag ement

to

g ive

divisional

manag ers

"a substantial deg ree

of f reedomin their administration of the resources entrusted to them"

(S olomons 1965, 9).

More

recently , Brickley

et al.

(1997)

describe several cases where innovations in division

perf ormance

measurement f ail because concurrent decentralization

chang es

were not made.

When the use of DS Ms

increases,

ceteris

paribis,

we assume that

corporate manag ement

is better able to

judg e

the actions of divisional

manag ers.

In

turn,

they

will be more

willing

to

deleg ate

decision rig hts. In

contrast,

a reduced use of DS Ms will result in a reduction

in the decision

rig hts deleg ated

to divisional

manag ers. Corporate manag ement

will make

this choice when DS Ms are limited in

capturing

the

perf ormance

of

divisions-centralizing

decision

making

becomes a viable control alternative

(Milg rom

and Roberts 1992, 32).

We

thus

expect

that the use of DS Ms will be

positively

related to the level of decentralization.

Inf ormation Asy mmetry

Ceteris

paribus, corporate manag ement

will

deleg ate

decision

rig hts

to divisional man-

ag ers

who

possess specif ic knowledg e (Jensen

and

Meckling

1992;

Brickley

et al.

1997).

Conversely ,

if

knowledg e

is not

impacted

at lower

levels,

corporate manag ement

has the

inf ormation

necessary

to select

optimal

action choices f or the division. There is no net

benef it associated with

deleg ating

decision

rig hts (Baiman

et al.

1995;

Jensen and

Meckling

1992). We, theref ore,

expect

a

positive

relation between the level of decentralization and

the level of inf ormation

asy mmetry .

Divisional

Initerdependencies

Interdependencies among

divisions can result in

neg ative

externalities f or the f irmwhen

decision

making

is decentralized. When divisional

manag ers

are

deleg ated

decision

rig hts

'

We describe above how

interdependencies

andinf ormation

asy mmetry

af f ect the inf ormativeness of DS Ms and

hence their use. It seems reasonable to assume that other f actors af f ect the inf ormativeness of DS Ms as well.

Note that Banker and Datar

(1989) arg ue

that inf ormativeness is a f unction of

precision

and

sensitivity .

Our

control

variables,

precision

and

sensitivity , attempt

to

capture any remaining

dif f erences in the inf ormative-

ness

(use)

of DS Ms, af ter

accounting

f or the ef f ect on inf ormativeness of inf ormation

asy mmetry

and

interdependencies.

The

Accounting

Review, July 2004

550

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All use subject to JSTOR Terms and Conditions

Determinants

of

Control

S y stemDesig n

in Divisionalized F irms

they

have incentives to

optimize

their own division's

perf ormance

and

ig nore

the conse-

quences

of their actions on other divisions

(F isher 1994;

Bushman et al.

1995;

Christie et

al.

2003). Corporate manag ement

will

attempt

to minimize these externalities

by

central-

izing

decision

making .

Ceteris

paribus,

we

expect

that the net benef its associated with

decentralization will decrease when

interdependencies

are

hig h;

that

is,

we

expect

the re-

lation between

interdependencies

and decentralization to be

neg ative.

Control Variables:

Division-S pecif ic

F actors

Prior research

arg ues

that the

operating

environment of a division inf luences

corporate

manag ement's

decision to

deleg ate

decision

rig hts (Brickley

et al.

1997;

Milg rom

and

Roberts

1995;

Nag ar 2002). We, theref ore,

control f or

specif ic

contextual f actors

relating

to the division

itself ,

namely

the

g rowth opportunities

and size. We do not make a

prediction

about the

sig n

of the association f or these two variables due to

conf licting arg uments

and

empirical

evidence.7

F ollowing prior

research,

we also control f or the inf luence of

manag erial

characteristics

on control

sy stem desig n (Nag ar 2002). Empirical

evidence

provides

some

support

that

corporate manag ement's

choice to

deleg ate

decision

rig hts

is inf luenced

by

the

ability

of

the division

manag er.8

We also

expect,

ceteris

paribus,

that

corporate manag ement

will

deleg ate

decision

rig hts only

when a certain level of trust is

developed

between

corporate

and divisional

manag ers.9

Our model controls f or the ef f ect of moral hazard on decentralization choices. While

there is some evidence that

mitig ates

this concern

(Baiman

et al.

1995;

Christie et al.

2003),

it is

possible

that the combination of inf ormation

asy mmetry

and size results in

sig nif icant

moral hazard costs. Inf ormation

asy mmetry provides

the

ag ent

with the inf ormation to

behave

opportunistically

and size increases the rents

ag ents

are able to extract f romthis

behavior

(Milg rom

and Roberts

1992, 573). Thus,

when both these conditions exist

(i.e.,

larg e

levels of inf ormation

asy mmetry

and

larg e size)

the cost of decentralization

may

outweig h

the benef its. If this is the

case,

then we will not observe the main ef f ects of

inf ormation

asy mmetry

and size on decentralization.

S ummary

of

Expectations

Table 1

provides

a

summary

of our

expectations.

III.

METHOD, MODEL,

AND ECONOMETRIC IS S UES

S ample

We use a

randomly

selected

sample

of f irms listed on the AmsterdamS tock

Exchang e.

We f irst contacted the f inancial controller to obtain

permission

to undertake the

study

and

to

identif y

names of relevant divisions. Once the f irm

ag reed

to

participate,

we visited

7Nag ar (2002) arg ues

that

g rowth opportunities

will increase the level of decentralization as this f acilitates the

involvement of divisional

manag ers

in

scanning

and environment and

exploiting

the

opportunities

available.

However,

others

arg ue

that

corporate manag ement

will retain

decision-making power

to ensure that

opportunities

f or

g rowth

are

optimized (Ag hion

andTirole

1997).

S imilar

ambig uity

exists

concerning

the ef f ect of size on

the decentralization. It is of ten

arg ued

that size is relatedto the level of decentralization

(Bolton

and

Dewatripont

1995;

Vancil

1979; Lawrence andLorsch

1967)

and

y et empirical

evidence is mixed

(Miller 1987).

8 F or

example,

Baker et al.

(1994)

andothers

(Medof f

andAbraham

1980)

demonstrate that more

talented,

hig hly

educatedindividuals are

promoted

to

hig her-level positions

andthus are

g iven

more

responsibilities

within the

f irm.

9

This relation has not been

empirically

examined

directly . However,

research in the

manag ement

andeconomics

literatures

provide

theoretical

support

that this would be the case

(see

Nooteboomet al.

1997; Lorenz

1999).

The

Accounting Review, July

2004

551

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Abernethy ,

Bouwens,

and van Lent

TABLE 1

Predictive Ef f ects

Investig ated

in this

S tudy

Divisional

S ummary

Decentralization Measures

(DS Ms)

Choice Variables

Decentralization +

Divisional

S ummary

Measures +

Test Variables

Inf ormation

Asy mmetry

+

Interdependencies

Control Variables

Division

S pecif ic

Characteristics:

Growth NP

S ize NP

Moral Hazard

Divisional

Manag ers

Characteristics:

Ability

+

Trust +

Perf ormance Measure Characteristics:

S ensitivity

NP

Precision

divisional

manag ers

within the f irm to administer the

questionnaire.

This method of data

collection is

particularly

usef ul as it enables us to ensure that we have the e correct

respon-

dent,

that the f irmhas at least two

operating

divisions

(i.e., necessary

to test our

expectations

with

respect

to

interdependencies),

that divisions are

suf f iciently larg e,

and

f inally

to estab-

lish that divisions are autonomous and

report

to either the Chief Executive Of f icer or Chief

Operating

Of f icer of the f irm. Our

analy sis

is based on a

sample

of 78 divisional

manag ers.

Twenty -f ive percent

of the f irms contacted areed a to

participate.

Tests f or

response

bias

indicate that our

sample

is drawn f roma

representative

set of f irms.'0 Once f irms

ag reed

to

participate,

we achieved a 92

percent response

rate f rom the divisional

manag ers

contacted.

Measures

The measurement of the constructs is discussed in turn. Where

appropriate

we f ollow

Ittner and Larcker's

(2001)

recommendation and use "harder" data

(i.e.,

more

objective

data)

to

support

the

validity

of our measures. Where

multiple

items are used to measure a

construct,

we use the f actor score." All Likert-scale variables were standardized bef ore

'0 We assessed if the

sample

was

representative

of all other f irms listed on the AmsterdamS tock

Exchang e.

We

conductedt-tests

(Wilcoxon-tests)

f or dif f erences of means

(medians)

on variables

relating

to net

income, sales,

total

assets,

andmarket value of common

equity .

There were no

sig nif icant

dif f erences in the mean

(median)

values f or

any

of these variables

except

f or market value andthis was

only sig nif icant

at the 0.09 level.

l The f actor

analy sis

used

oblique

rotation andretainedf actors with an

eig envalue g reater

than

unity (Nunnally

andBernstein

1994).

The results of the f actor

analy sis

are not

provided

in the

paper,

but are available f romthe

authors. Researchers can either

compute

a

composite

variable that

captures

the

underly ing

construct

by averag ing

the standardizeditemscores

(Nunnally

and Bernstein

1994)

or use the f actor scores. We use f actor scores;

however,

the results are robust

ag ainst using

either method

(the

two methods

produce

variables that are correlated

at 0.99 in all

cases).

The

Accounting

Review,

July

2004

552

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All use subject to JSTOR Terms and Conditions

Determinants

of

Control

S y stemDesig n

in Divisionalized F irms

entering

theminto the f actor

analy sis.

The

survey

instruments used are

reproduced

in the

Appendix.

Choice Variables

Level of decentralization

(DECEN).

We measure the level of decentralization

using

an

adapted

version of the Gordon and

Naray anan (1984)

instrument. We

attempt

to

capture

what

Ag hion

and Tirole

(1997)

ref er to as "real

authority " by asking

division

manag ers

to

indicate their inf luence relative to their

superior's

inf luence on a

rang e

of f ive

key

decisions

(i.e., strateg y ,

human resource

manag ement, operations, marketing ,

and

investments) along

a

Likert-ty pe

scale of 1 to 7 where 1 = the division has all the inf luence and 7 = the

superior

has all the inf luence. We reverse-code this measure such that

hig h

values indicate

hig h

levels of decentralization. We use the results of f actor

analy sis, Chi-squared

tests,

and

the Cronbach

alpha

statistic

(0.73)

to

support

the use of the f ive-itemmeasure as a unidi-

mensional construct.

Use of divisional

summary

measures

(DS Ms).

We use

Keating 's (1997)

notion of

own-level measures to

capture

the use of DS Ms. These measures are those that summarize

division

perf ormance

in a

sing le

measure. In contrast to

Keating (1997),

our measure in-

cludes both f inancial

summary

measures

(e.g ., prof it, ROI)

and other

quantitative ef f iciency -

ty pe

measures

(e.g ., output data).

We ask

respondents

to

assig n weig hts

to the relative

importance

of DS Ms measures

vis-ai-vis other

perf ormance

metrics.'2

These other metrics

include f irm

summary

measures

(both stock-price-related

measures and f irm

prof itability

measures)

and measures that

provide perf ormance

inf ormation on

specif ic aspects

of

per-

f ormance within divisions

(specif ic, non-summary measures). Tog ether

these

ty pes

of

perf ormance

measures cover the

complete

continuumof

possible quantitative

metrics used

in a f irm. To

improve

the

consistency

of the

responses,

we f ollow Ittner and Larcker's

(2001)

advice and

specif y

the decision context in which

perf ormance

measures are used.

We ask

respondents

to indicate the

percentag e weig ht

(out

of a total of

100)

the

superior

assig ns

to each

ty pe

of

perf ormance

metric when s/he assesses

perf ormance. Converg ent

validity

of the measure is established

by

the Pearson correlation of DS Ms with an alternative

measure

captured

elsewhere in the

questionnaire.

This alternative measure asks the

superior

to

assig n

the

weig ht

attached to divisional

prof itability

measures

compared

to other

ty pes

of measures when

assessing perf ormance.

Prof it measures constitute an

important

subset of

all DS Ms. The correlation between these two measures is 0.33

(p

<

0.01).

This

provides

some evidence of the

validity

of our measure.

Test Variables

Interdependencies.

We

adopt Keating 's (1997)

instrument to measure

interdependen-

cies. The f irst itemasks

respondents

to

identif y

the extent to which their activities

impact

on other divisions' activities

(IMPACT-THEM),

and the other itemasks the extent to which

their

perf ormance

is af f ected

by

the activities carried out

by

other divisions

(IMPACT-YOU).

To be consistent with

Keating (1997),

we treat each item as a

separate

variable. This

approach

is

supported by

Lambert's

(2001) analy sis

that shows that these two

ty pes

of

interdependencies mig ht

have dif f erent ef f ects on

perf ormance

measurement. We

investig ate

12

Likert-ty pe

scales can be

problematic

as

they

allow

respondents

to answer that all

perf ormance

measures are

used. We wanted

respondents

to reveal the relative use of

perf ormance

measures. DS Ms can thus be

interpreted

as the relative

weig ht

division

summary

measures are

g iven by

a

manag er's superior during perf ormance

evaluation.

The

Accounting

Review,

July

2004

553

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Abernethy ,

Bouwens,

and van Lent

the

converg ent validity

of

IMPACT-THEM

and IMPACT-YOU

by computing

Pearson cor-

relations with three other measures:

(1) S UPPLY, (2) INDEP,

and

(3)

CHANGE. S UPPLY

is the sumof the

percentag e

of total

incoming g oods

or services sourced f romother divi-

sions and the

percentag e

of total

outg oing g oods

or services

provided

to other divisions.

This item

captures operating interdependencies

caused

by joint

cost and

supply

f unctions

or

dependent

demand f unctions. INDEP asks

respondents

to indicate the extent to which

their unit could

operate

as a stand-alone f irm. The

respondents

answer on a

f ully

anchored

Likert scale

(1

= not at

all,

7 =

completely ). Hig h

scores on this measure indicate f ewer

intraf irm

dependencies.

CHANGE measures the time it would take external

suppliers

to

meet the demand of a division's current internal customers.

Hig h

scores on a

f ully

anchored

Likert scale

(1 =

immediate

delivery possible,

7 =

delivery only

af ter more than 6

months)

indicate more

interdependencies

within the f irm. This variable is also a reasonable

proxy

f or

interdependencies.

If a division can make a

speedy chang e

to an external

supplier,

then

the division is less

dependent

on other divisions within the f irm. Pearson correlations be-

tween

IMPACT-THEM

and

S UPPLY, INDEP,

and CHANGE are

sig nif icant

and in the

pre-

dicted direction

(i.e., 0.50,

p

<

0.01; -0.36,

p

< 0.01; 0.46,

p

<

0.01,

respectively ).

We

f ind similar

support

f or the IMPACT-YOU construct and the three alternative measures

(i.e., 0.56,

p

< 0.01; -0.32,

p

< 0.01; 0.40,

p

< 0.01,

respectively ). Tog ether

these re-

sults

strong ly support

the

converg ent validity

of our

interdependency

measures. Note also

that both S UPPLY and CHANGE ask f or "harder"

responses

than

just perceptions

of

interdependencies.

Inf ormation

asy mmetries (INF ORAS YM). Using

the six-item scale

developed by

Dunk

(1993), manag ers

rate their inf ormation relative to their

superior's

in their area of

responsibility

on a

seven-point Likert-ty pe

scale. The results of the f actor

analy sis

(not

reported)

and scale

reliability

are consistent with

using

the six items as a unidimensional

scale

(Cronbach alpha

=

0.86).

We

investig ate

the

converg ent validity

of our measure of

inf ormation

asy mmetries by computing

Pearson correlations with two other variables that

should

proxy

f or

specif ic knowledg e

of the division

manag er: (1)

the

manag er's experience

(in y ears)

in his

current

position

(EXPINPOS ),

and

(2)

the

manag er's ag e (AGE).

These

variables are considered to be reasonable

proxies

f or inf ormation

asy mmetry

as more ex-

perienced

and older

manag ers

are

likely

to have

unique knowledg e

about local circum-

stances and context. This

knowledg e mig ht

be hard to communicate to

superiors,

which

implies

that inf ormation

asy mmetries

arise. We also include a

proxy

f or the relative level

of

knowledg e

of the division

manag er

about the business vis-a-vis the

corporate manag er

by measuring

the division

manag er's experience

in the

industry

relative to his/her

superior

(EXPIND).

All three

proxy

variables are based on hard data

and, thus,

partially

address

concerns with the use of

perception

measures. There is a

sig nif icant

and

positive

relation

between INF ORAS YM and all three alternative measures

(INF ORAS YMIEXPINPOS

=

0.23,

p

<

0.05;

INF ORAS YMIAGE

= 0.31,

p

< 0.01; INF ORAS YMIEXPIND= 0.23,

p

=

0.06).

These results

provide

reasonable

support

f or the

validity

of our measure.

Control Variables

f or Equation (1) (Use of DS Ms)

Perf ormance measurement characteristics. We measure the

sensitivity

of

perf orm-

ance measures

(S ENS ) by asking respondents

to distribute 100

points

over all

perf ormance

measures in such a manner that the most "sensitive" measure receives the most

points.

The

percentag e points assig ned

to DS Ms are used to measure the

sensitivity

of

summary

mea-

sures. The

precision

of the measure is

captured

in a similar manner. The

percentag e points

assig ned

to DS Ms are used as our measure of

precision

(PRECIS ION).

The

Accounting

Review,

July 2004

554

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All use subject to JSTOR Terms and Conditions

Determinants

of

Control

S y stem

Desig n

in Divisionalized F irms

Control Variables

f or

Equation (2) (DECEN)

Division-specif ic

f actors. We

developed

an instrument to measure

g rowth opportunities

(GROWTH).

The instrument asks

manag ers

to rate

g rowth expectations

f or

(1)

their own

division and f or

(2)

the

industry

in which their division

operates. Respondents

rated

g rowth

expectations

on a

seven-point Likert-ty pe

scale where 1

=

strong

decline and 7 =

sig nif icant

increase. F actor

analy sis

and the Cronbach

alpha

statistic

(0.77) support

the summation of

the two items. We def ine S IZE as a

categ orical

variable that measures the number of em-

ploy ees working

in a division. The

categ ories rang ed

between 1

(<

50

employ ees)

and 8

(more

than

2,000

employ ees).

To reduce scale

problems,

S IZE is standardized to have zero

mean and a standard deviation of

unity . F inally ,

we control f or

industry

ef f ects in each of

the

reg ressions.

We do so

by def ining

f our indicator variables to

capture potential industry

ef f ects.

Deg rees

of f reedomconsiderations

prevent

us f rom

using

an indicator f or each

industry

in the

sample.

Instead,

we

reg roup

the industries into f our

categ ories (i.e., f oodstuf f ,

apparel,

and

textile; metal,

printing

and

plastics;

electronics; services)

and include three

dummy

variables in each of the

reg ressions.

Moral hazard. We include a

multiplicative

termin the decentralization

equation

that

is

composed

of an interaction between inf ormation

asy mmetry

and size. This interaction

term

captures

the

capures

onditions that

g ive

rise to moral hazard. Inclusion of the interaction term

enables us to assess whether the main ef f ects of inf ormation

asy mmetry

and size variables

on decentralization remain

positive

when conditions associated with moral hazard are

pres-

ent

(Jaccard

and Turrisi

2003;

Wooldridg e 2000).13

Divisional

manag er

characteristics. We

identif y

f rom

prior

literature the

importance

of two divisional

manag er

characteristics on the decision to

decentralize,

namely ,

the

ability

of the divisional

manag er

and the trust between

corporate

and divisional

manag ement.

Ability

is

captured using

education as a

proxy . Respondents

were asked to state their

hig hest

level of education and

responses

are coded as

(1) only hig h

school, (2)

some

colleg e

education, (3) complete f our-y ear university -level prog ram.

Trust is

captured using expe-

rience as a

proxy . Manag ers reported

the number of

y ears they

were

employ ed

in their

current

position (EXPINPOS ).

We standardized the variable to have zero mean and standard

deviation

unity .

Model and Econometric Issues

Model

S pecif ication

We test our

hy potheses using

a simultaneous

equations

model that describes the deter-

minants of each of the

endog enous

variables and their interrelation. Our

sy stem

of

equations

is described as f ollows:

DS Mi

=

oo

+

a,DECEN_Pi

+

a2INF ORAS YM,

+

oa3IMPACT-THEM,

+

oaIMPACT-YOU,

+

c5S ENS ,

+

ox6PRECIS ION,

+ EDS M.

(3)

'3

The interaction termis the

cross-product

of inf ormation

asy mmetry

andsize. It can be

represented

in

alg ebraic

f ormas f ollows: Y = a +

a2X,

+

a3X,

+ a4

X,X,,

where Y =

decentralization, X,

=

inf ormation

asy mmetry

andX,

=

size,

andX1X,

=

cross-product

between X, andX,. While our model includes the interaction termin

order to assess its af f ect on the coef f icients

relating

to inf ormation

asy mmetry

and

size,

a

priori

we also

expect

the coef f icient of the interaction termto be

neg ative,

i.e.,

we

expect

the relation to be less

positive (or

more

neg ative)

in

larg er

f irms

compared

to smaller f irms.

The

Accounting

Review,

July

2004

555

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Abernethy , Bouwens,

and van Lent

DECEN,

=

Po

+ 31DS M_P +

32INF ORAS YM,

+

I33MPACT-THEM,

+

34IMPACT-YOUi

+

PsS IZEi

+

36GROWTHi

+

[7(S IZE,

*

INF ORAS YM,)

+

38EDUCATE,

+

39EXPINPOS i + DECEN. (4)

S imultaneity

Bias

The

endog enous

variables DECEN and DS M are

jointly

determined in

equilibrium;

theref ore

ordinary

least

squares (OLS )

estimation of the model

may

be

inappropriate

(Greene 1997).

We use the Durbin-Wu-Hausman test

(MacKinnon 1992)

to determine if

simultaneity

bias

exists.'4

We f ind no evidence of a

simultaneity

bias

(F

=

0.59 and

1.08;

p

= 0.45 and

0.30)

and

consequently report

OLS

results.'5

Note that these test results do

not

imply

that DECEN and DS M are not

interrelated;

the test

only sug g ests

that OLS

estimation of the

sy stem

is unbiased.

IV. RES ULTS

Descriptive

S tatistics

Table

2,

Panel A

presents

the

summary

statistics f or each variable. All measures in the

equations

have variation with most of them

spanning

the entire set of theoretical values.

Panel B

presents

the Pearson correlations

among

the variables. There is a

positive

and

sig nif icant

relation between level of decentralization and use of DS Ms

(r

=

0.29,

p

<

0.01).

We also f ind that inf ormation

asy mmetries

are

positively

related with decentralization

(r

=

0.61,

p

<

0.01)

but have no

sig nif icant

relation with DS Ms. Decentralization is

neg atively

related to one f ormof

interdependency (IMPACT-YOU;

r =

-0.26,

p

<

0.05),

whereas the

use of DS Ms is

neg atively

associated with the other f ormof

interdependency (IMPACT-

THEM; r

=

-0.27,

p

<

0.05).

The relations between the

endog enous

and control variables

are as

expected.

Decentralization is

positively

and

sig nif icantly

associated with

S IZE,

GROWTH,

and a

manag er's

education

(r

=

0.31,

p

<

0.01;

r =

0.39,

p

<

0.01;

and r

=

0.35,

p

<

0.01,

respectively ).

The use of DS Ms is

positively

and

sig nif icantly

related to

S ENS and PRECIS ION

(r

=

0.36,

p

< 0.01 and r =

0.28,

p

<

0.01).

Overall these results

provide

some

preliminary

univariate evidence that is consistent with our

expectations.

The

correlations

among

the

exog enous

variables are not

suf f iciently hig h

to warrant concerns

with

multicollinearity (Grif f iths

et al.

1993).

Table 3

presents

inf ormation on the relative use of

perf ormance

metrics in our

sample.

Divisional

summary

measures are

by

f ar the most

important perf ormance

measures used

(i.e.,

on

averag e

f irms

put

57

percent weig ht

on this

measure).

This is consistent with other

evidence on the use of these measures

(Horng ren

et al.

1999)

and

supports

our rationale

14

The Hausman test is an

asy mptotic

test andits

properties

in f inite

samples

are unknown. We verif iedthe small

sample power

of this test

using

a Monte Carlo simulation. The results

(not reported)

indicate that the null

hy pothesis

of no

simultaneity

bias needs to be

rejected

at lower values of the F -statistic than under

asy mptotic

conditions. The values of the F -statistic we f ound in our

sample are, however,

well below the critical values

sug g ested by

the Monte Carlo simulation.

15

As a robustness check we also estimate the model

using

two

stag e

least

squares (2S LS ).

All results obtained

using

2S LS reinf orce our earlier conclusions

(i.e., sig ns

and

sig nif icance

are not

af f ected)

and thus are not

reported

here. Note that

using

OLS to estimate the model circumvents the

problems

associated with weak

instrumental variables in 2S LS (Nelson

andS tartz

1990;

Bound et al.

1995). Moreover,

g iven

that our

sample

size is 78 observations,

which is rather small

g iven

the number of

parameters being estimated,

the use of OLS

would seem

pref erable.

The

Accounting

Review,

July

2004

556

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a

a

,

TABLE 2

Descriptive

S tatistics and Correlations

Panel A:

S ummary

S tatistics

S ummary

statistics f or decentralization

(DECEN),

use of divisional

summary

measures

(DS M),

inf ormation

asy mmetries (INF ORAS YM), impact

of

own division on

perf ormance

of other divisions in f irm

(IMPACT-THEM), impact

of other divisions in f irmon

perf ormance

of own division

(IMPACT-YOU), g rowth opportunities (GROWTH),

size of the division

(S IZE),

interaction of size and inf ormation

asy mmetry (INTERACTION

EF F ECT), sensitivity

of divisional

summary

measures

(S ENS ), precision

of divisional

summary

measures

(PRECIS ION), experience

of divisional a

manag er

in current

position (EXPINPOS ),

level of education

(EDUCATE). S ample

consists of 78 divisions. Data obtained f rom

survey

of divisional

'

manag ers.

t

Variable Mean S td. Dev. Minimum Median Maximum

DECEN 0 0.84 -2.37 0.20 1.30

DS M 0.57 0.25 0 0.50 1.00

INF ORAS YM 0 0.93 -2.18 0.14 1.43

IMPACT-THEM 0 1.00 -1.77 -0.16 1.45

IMPACT-YOU 0 1.00 -1.70 -0.08 1.54

' S S IZE 0 1.00 -1.78 -0.01 1.32

b GROWTH 0 0.77 -1.51 -0.07 1.41

INTERACTION EF F ECT 0.04 0.91 -2.10 0 2.24

PRECIS ION 0.58 0.25 0 0.53 1.00

> S ENS 0.60 0.21 0 0.60 1.00

EDUCATE 0 1.00 -2.74 0.76 0.76

I EXPINPOS 0 1.00 -0.54 -0.30 5.62

(continued

on next

pag e)

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TABLE 2 (continued)

Panel B: Pearson Correlations between All Variables (ref er to Table 2, Panel A f or variable def initions)

Correlati'ons are based on 78 observations.

1

1.00

2 3 4 5 6 7

0.29*** 1.00

INF ORAS YM

IMPACT-THEM

IMPA CT- YO U

S IZE

GROWTH

PRECIS ION

S ENS

EDUCATE

EXPINPOS

-0.17

-0.26**

0.3 1*

0.39***,

0.02

-0.01

0.35**1*

0.14

0.15

-0.27~*

-0.11

0.10

0.06

0.28**

0.17

0.14

1.00

-0.03

-0.08

0.04

0.13

0.04

0.11

-0.05

0.22*

1.00

0.66***

-0.01

0.06

-0. 19*

-0.20'

0.01

-0.26*

*

1.00

-0.14

0.10

-0.28**

-0. 19*

0.11

-0.30*~**

1.00

0.02

-0.01

0.03

0.20-h

0(.09

1.00

-0.20*

-0. 2)8

*

0.09

0.05

1.00

0.34***

0.01

0.18

1.00

-0.14

0.08

.L.

IM

rt

-0.39*** 1.00

rllz)

ll-*

Z71

tz

Z

f ll

1--a

'S ."

z

Z-

-t

z

f lz

ad denotes 10%, 5%, and I1%

sig nif icance

levels (two-tailed), respectively .

zrl

rt

r

C

C

z

:z

Z.

Z

(Q

I'llIC

t

f t

:z-

llz-

t-1)

Q

Z

41.1

1. DECEN

2. DS M

GoA

3.

4.

5.

6.

7.

8.

9.

10.

11.

8 9 10 11

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All use subject to JSTOR Terms and Conditions

Determinants

of

Control

S y stemDesig n

in Divisionalized F irms

TABLE 3

Relative Use (in

Percentag es)

of F our

Ty pes

of Perf ormance Metrics

by

a

S uperior

in the

Perf ormance Evaluation of a Divisional

Manag er

(n

=

78)

Ty pe

of Perf ormance Metric Mean S td. Dev. Median Minimum Maximum

F irm-Level

S ummary

Measures

S tock-price-related

0.04 0.09 0.00 0.00 0.50

Other f irm-level

summary

0.22 0.21 0.20 0.00 0.90

measures

Divisional

S ummary

0.57 0.25 0.50 0.00 1.00

Measures

S pecif ic, Non-S ummary

0.17 0.16 0.13 0.00 0.80

Measures

f or

f ocusing

on these measures.

Relatively

little

weig ht (4 percent)

is

g iven

to

stock-price-

related measures.

Indeed,

a

majority

of f irms do not use this measure to evaluate the

per-

f ormance of divisions. F irm-level

summary

measures and

specif ic, non-summary

measures

receive on

averag e

similar

weig ht (22 percent

and 17

percent, respectively ).

Main

F inding s

Table 4

presents

the OLS estimation results of the two

reg ression equations.16

The

results of

Equation (1) (Table 4,

Panel

A) provide strong

evidence that the use of DS Ms is

positively

related to the

deg ree

of decentralization

(aLI

=

0.11,

t

=

2.67).

It

appears

that the

choice to

deleg ate

decision

rig hts

increases

top manag ement's

use of DS Ms.

Contrary

to

our

expectations,

inf ormation

asy mmetry

has no

sig nif icant

inf luence on the use of

DS Ms,

but we do f ind that divisional

interdependencies

are related to the use of DS Ms.

However,

the ef f ect

depends

on the

ty pe

of

interdependency . S pecif ically ,

we f ind a

sig nif icant

and

neg ative

relation

(CX3

=

-0.07,

t

=

-2.23)

when the division's activities af f ect other divi-

sions

(IMPACT-THEM),

but a

positive

and

sig nif icant

ef f ect

(c4

=

0.07,

t

=

1.96)

when

the division is af f ected

by

other divisions

(IMPACT-YOU).

This

positive

relation is unex-

pected

and

contrary

to our

expectations.

We also f ind that the

sensitivity

of a

perf ormance

measure increases its use

(5

=

0.34,

t

=

2.65).

The

precision

of a measure is

only

mar-

g inally

associated with the use of DS Ms (o6

=

0.18,

t

=

1.52).

All

industry

dummies are

statistically insig nif icant

in

explaining

the use of

summary

measures. The

adjusted

R2 of

Equation (1)

indicates that the model has reasonable

explanatory power

(i.e.,

23.0

percent).

16

The robustness of our results is tested

by

(1)

relaxing

the

assumption

of

exog eneity

of inf ormation

asy mmetry ,

and

(2) testing

f or common method variance. There is some

arg ument

that inf ormation

asy mmetry

is an

endog -

enous variable

(Zimmerman 2001; Ag hion

and Tirole

1997).

We address this issue

by including

a third

equation

into our model with inf ormation

asy mmetry

as a

dependent

variable and reestimate our model

using

2S LS

(based

on the results f roma Hausman

test).

The 2S LS estimates f or the

three-equation

model indicate that the coef f i-

cients are of a similar

mag nitude

and

sig n

to our

two-equation

model. Our inf erences remain

unchang ed.

We

conduct Harman's

(1967) sing le-f actor

test to evaluate the extent to which common method variance exists in

the data. If there is a substantial amount of common method

variance,

then either a

sing le

f actor will

emerg e

or one

g eneral

f actor will account f or the

majority

of the covariance

among

the variables. The test statistic is

hig hly sig nif icant (X2

=

306.5,

d.f .

=

199, p

<

0.001), rejecting

the null that one

sing le

f actor accounts f or the

covariance

among

the variables. We conclude that common method bias is not a serious

problem

in this data

set.

The

Accounting

Review,

July

2004

559

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Aberethy , Bouwens,

and van Lent

TABLE 4

Ordinary

Least

S quares Reg ressions

DS Mi

=

oto

+

otlDECEN_Pi

+

ot2INF ORAS YMi

+

3IMPACT-THEMi

+

ax4MPACT-YOU,

+

c5S ENS i

+

o.6PRECIS ION,

+

?f S M (1)

DECEN,

=

Po

+ 31DS M P +

32INF ORAS YM,

+

P3IMPACT-THEM,

+ 34MPACT-YOUi +

S S IZE,

+

36GROWTH,

+

P7(S IZEi

*

INF ORAS YM,)

+

8EDUCATE,

+

3EXPINPOS ,

+ EDECEN

(2)

Panel A:

Dependent

Variable: DS M

(n

=

78)

Predicted Prob.

S ig n

Coef f icient S td. Error t-statistic

(two-sided)

Intercept

0.24 0.09 2.67 0.01

DECEN + 0.11 0.04 2.67 0.01

INF ORAS YM - -0.03 0.03 -0.82 0.42

IMPACT-THEM - 0.07 0.03 -2.23 0.03

IMPACT-YOU - 0.07 0.04 1.96 0.05

S ENS NP 0.34 0.13 2.65 0.01

PRECIS ION + 0.18 0.12 1.52 0.13

F -statistic: 3.56

Prob.

(F )

=

0.001

Adj.

R2 23.0%

Panel B:

Dependent

Variable: DECEN

(n

=

78)

Predicted Prob.

S ig n

Coef f icient S td. Error t-statistic

(two-sided)

Intercept

-1.55 0.30 -5.03 0.00

DS M + 0.23 0.24 0.93 0.35

INF ORAS YM + 0.46 0.06 7.28 0.00

IMPACT-THEM - 0.04 0.08 0.53 0.60

IMPACT-YOU - -0.27 0.08 -3.21 0.00

S IZE NP 0.12 0.07 1.84 0.07

GROWTH NP 0.31 0.08 3.77 0.00

S IZE*INF ORAS YM - -0.09 0.07 -1.34 0.19

EDUCATE + 0.51 0.11 4.59 0.00

EXPINPOS + 0.06 0.06 0.99 0.32

F -statistic: 14.83

Prob.

(F )

=

0.000

Adj.

R2 68.3%

S ample

consists of 78 divisions.

Data obtained f rom

survey

of division

manag ers.

Industry

dummies included in both

reg ression equations (not reported).

Variable def initions: Decentralization

(DECEN),

use of divisional

summary

measures

(DS M),

inf ormation

asy mmetries (INF ORAS YM), impact

of own division on

perf ormance

of other divisions in f irm

(IMPACT-THEM),

impact

of other divisions in f irmon

perf ormance

of own division

(IMPACT-YOU), g rowth opportunities

(GROWTH),

size of the division

(S IZE),

interaction of size andinf ormational

asy mmetry (S IZE

*

INF ORAS YM),

sensitivity

of divisional

summary

measures

(S ENS ), precision

of divisional

summary

measures

(PRECIS ION),

experience

of divisional

manag er

in current

position (EXPINPOS ),

level of education

(EDUCATE).

The

Accounting

Review,

July

2004

560

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Determinants

of

Control

S y stemDesig n

in Divisionalized F irms

The results in Table

4,

Panel B are consistent with our

expectation concerning

decen-

tralization and inf ormation

asy mmetry .

The relation is

positive

and

sig nif icant.

It is inter-

esting

to note that this relation holds even af ter

considering

the

potential

ef f ect of moral

hazard. Recall that there is some concern in the literature that as the

potential

f or

oppor-

tunistic behavior

increased,

corporate manag ement

would be reluctant to

deleg ate

decision

rig hts,

even in the

presence

of inf ormation

asy mmetry .

Our

equation

includes an interaction

termto

proxy

f or moral hazard. We f ind that even when inf ormation

asy mmetry

and size

are

larg e (the

situation where we

expect

moral hazard

problems

to be most

severe),

the

relation between inf ormation

asy mmetry

and decentralization remains

positive

and

sig nif i-

cant.1 Our

f inding s

also indicate

(in

Table

4,

Panel

B)

that the use of DS Ms is unrelated

to the level of

decentralization,

inconsistent with our

expectations.

We f ind evidence that

interdependencies

are

neg atively

associated with decentralization as

predicted (a4

=

-0.27,

t =

-3.21). However,

this

only

occurs with IMPACT-YOU

(the

extent to which a division's

perf ormance

is af f ected

by

activities carried out in other

divisions).

This

sug g ests

that f ewer

decision

rig hts

are

assig ned

to lower-level

manag ers

if the

spillover

ef f ects f romother

divisions af f ect a

manag er's perf ormance.

S ize and

g rowth opportunities

are also

positively

correlated with decentralization

(15

=

0.12,

t = 1.84 and 6 =

0.31,

t

=

3.77).

The relation

between decentralization and size remains

positive

when we control f or the inf luence of

moral

hazard.'8

We f ind that more

hig hly

educated

manag ers

receive more decision

rig hts

(P8

= 0.51, t =

4.59).

The

manag er's experience

in his current

position,

and the

industry

dummies,

are all

statistically insig nif icant

at conventional levels of

sig nif icance (i.e.,

p

>

0.10). F inally ,

the

adjusted

R2 of the

equation

is

hig h (68.3 percent).

Additional

Analy ses

Our results indicate that the use of DS Ms increases when f irms decentralize and de-

creases as

interdependencies

increase. This observation leaves

open

the

question

if (and

how)

other

perf ormance

measures are used to

compensate

f or the

(de)increase

in DS Ms.

Recall that we measure the use of DS M as the

weig ht placed

on DS M vis-a'-vis f irm-level

summary

measures and other more

specif ic, non-summary

measures. We are thus able to

shed some

lig ht

on this issue.

F irst,

we examine the correlation between DS Ms and the use

of f irm-level

summary

measures

(Questions

2i and 2ii in the

Appendix)

and between DS Ms

and the use of

specif ic, non-summary

measures

(Question

2iv in the

Appendix).

The cor-

relation between DS Ms and the use of f irm-level

summary

measures is

sig nif icantly neg ative

(r

=

-0.76,

p<0.01).

The correlation between DS Ms and the use of

specif ic, non-summary

measures is also

neg ative

and

sig nif icant (r

=

-0.42,

p<0.01).

These correlations

sug g est

that when

corporate manag ement

decreases its use of

DS Ms,

they put

more

weig ht

on f irm-

level

summary

measures and/or more

specif ic, non-summary

measures. To f urther remove

ambig uity

about how dif f erent

perf ormance

measures are used in relation to decentralization

choices and our test variables we rerun our

orig inal

model,

but use two alternative

per-

f ormance measure variables:

(1)

F LEVEL and

(2)

S PECDIV.

17 The

partial

relation between decentralization and inf ormation

asy mmetry

is

representedby

the

expression P,

+

17

* S IZE.

Theref ore,

of interest is a F -test of the

joint hy pothesis

12 =

-7

=

0. The F -statistic is 30.84

(d.f .

=

2, 65;

p

<

0.01).

S ince S IZE is a standardized

variable,

the coef f icient estimate 12 is the

partial

ef f ect of

INF ORAS YM on DECEN evaluatedf or

averag e-sized

divisions. F or these

divisions,

we f indthat inf ormation

asy mmetry

is

positively

associated with decentralization. Even f or the

larg est divisions,

the relation remains

sig nif icantly positive.

18 The

partial

relation between decentralization andsize is

representedby

the

expression

15 +

17

*

INF ORAS YM.

Theref ore of interest is the

joint

test that

35s

+

17

=

0. The F -statistic is 2.57

(d.f . 2, 65; p-value

< 10

percent),

which indicates that size anddecentralization are associated.

The

Accounting Review, July

2004

561

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Abernethy , Bouwens,

and van Lent

F LEVEL is the use of f irm-level

summary

measures relative to the use of DS Ms

(def ined

as the sumof

Questions

2i and 2ii divided

by

the sumof

Question 2i, 2ii,

and

2iii).

This

def inition

(and rescaling )

of F LEVEL allows us to conclude that

any

increase

(decrease)

in

the use of this variable

implies

a decrease

(increase)

in the use of DS Ms. Prior literature

(Keating 1997)

has

sug g ested

that f irm-level

summary

measures will be used to

provide

incentives f or

cooperation

and reduce the noise of DS Ms when

interdependencies

are

hig h.

S PECDIV is the use of

specif ic, non-summary

measures relative to the use of DS Ms

(def ined

as

Question

2iv divided

by

the sumof

Questions

2iii and

2iv).

This def inition

(and

rescaling )

allows us to conclude that

any

increase

(decrease)

in the use of

specif ic,

non-

summary

measures

implies

a decrease

(increase)

in the use of DS Ms.

Theory sug g ests

that

DS Ms,

rather than

specif ic, non-summary

measures will be

positively

associated with de-

centralization

(see also,

Jensen

2001). Using

more

specif ic

measures is inconsistent with

providing

decision

rig hts

to

manag ers

since

asking manag ers

to

perf orm

on

specif ic

mea-

sures is

analog ous

to

restricting

the action choices of these

manag ers.

The results

(not presented here)

of the

reg ressions

are consistent with these

expecta-

tions.

Taking tog ether

the results f romthese additional

analy ses

and the orig inal model, we

conclude that a decline in decentralization is associated with a shif t f romDS Ms to

specif ic,

non-summary

measures and that more

interdependencies

are associated with a shif t f rom

DS Ms to f irm-level

summary

measures.

V. DIS CUS S ION AND CONCLUDING COMMENTS

This

study soug ht

to

develop

a better

understanding

of the determinants of control

sy stemdesig n

choices and the interrelation between those choices. The evidence

presented

here is

g enerally

consistent with our

expectations.

Our results indicate that DS Ms are used

more

intensively

in decentralized divisions. This is consistent with earlier

empirical

work

that has shown decentralization choices to be an

important

determinant of

manag ement

accounting practices.

Within-f irm

dependencies

also inf luence the use of DS Ms. If the f ocal

division

impacts

the

perf ormance

of the other divisions within the

f irm,

then

corporate

manag ement's

use of DS Ms decreases. This result is consistent with our

expectations,

with

Keating 's (1997) empirical f inding s,

and also with Holmstrom's

(1979)

inf ormativeness

hy pothesis.

Divisional

perf ormance

measures become "noisier" as

interdependencies

in-

crease and thus are less ef f ective in

evaluating

the division's

unique

contribution. Our

additional

analy sis

indicates that

corporate manag ement

shif ts f romthe use of DS Ms to

f irm

summary

measures

(Keating

1997;

Bushman et al.

1995).

In

contrast,

and

contrary

to

our

expectations,

we f ind that if other divisions af f ect the

perf ormance

of the f ocal

unit,

then the use of DS Ms increases. This

f inding

is consistent with the

inf ormativeness

principle

if DS Ms

provide

inf ormation on how well a

manag er copes

with

interdependencies.

A

principal

could use such inf ormation to

adjust

other

perf ormance

measures so he can "better

evaluate the

thing

the

ag ent

does control"

(Lambert 2001, 24).

While this is

post

hoc

rationalization,

f urther theoretical and

empirical

research is

required

to

f ully

understand the

impact

of alternative f orms of

interdependencies

on

perf ormance

measurement choice.

We f ind no relation between inf ormation

asy mmetries

and the use of DS Ms. We ex-

pected

that

corporate manag ement

would be reluctant to

rely

on these measures as

they

become

increasing ly "incomplete"

when

they

do not have the same inf ormation set as

divisional

manag ers.

Our results do not

support

our

expectation,

but rather indicate that the

use of DS Ms is

only

determined

by

the amount of decision

rig hts

allocated to divisional

manag ers.

This result needs to be

interpreted

in the

lig ht

of the evidence

relating

to decen-

tralization choices and inf ormation

asy mmetry

(discussed below).

Inf ormation

asy mmetry

The

Accounting Review,

July 2004

562

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Determinants

of

Control

S y stemDesig n

in Divisionalized F irms

is a

sig nif icant explanatory

variable f or

corporate manag ement's

choice to decentralize.

Thus,

it would

appear

that once the f it between decentralization and inf ormation

asy mmetry

occurs,

perf ormance

measures are used to monitor divisional

manag ers'

use of decision

rig hts.

That

is,

inf ormation

asy mmetry

does not

directly

inf luence the use of these

measures,

but rather

indirectly throug h

the

assig nment

of decision

rig hts.

As

expected,

we f ind that

the

sensitivity

of the DS Ms leads to increased use

by corporate manag ement.

Inf ormation

asy mmetry

and

interdependencies

are both

sig nif icant

determinants of de-

centralization.

Hig her

levels of inf ormation

asy mmetry

increase the level of decentralization

even in the

presence

of moral hazard. This is consistent with earlier research

arg uing

that

the costs associated with decentralization are more than

outweig hed by

the benef its

(Baiman

et al.

1995;

Christie et al.

2003).

Consistent with our

hy pothesis,

we f ind a

neg ative

asso-

ciation between

interdependencies

and decentralization.

However,

the

neg ative

relation is

only

f ound when other divisions af f ect the f ocal division. This

sug g ests

that division man-

ag ers perceive

their decision

authority

declines

only

when other divisions af f ect their

op-

erations. On the other

hand,

there is no ef f ect on their sense of

empowerment (or

disem-

powerment)

when their division inf luences others. This result is

intuitively appealing ,

particularly g iven

that we

operationalized

decision

rig hts using Ag hion

and Tirole's

(1997)

notion of "real"

authority ,

i.e.,

we

captured

divisional

manag ers'

assessment of their inf lu-

ence over a

rang e

of decisions. It is

entirely possible

that divisional

manag ers

believe there

is little or no "real"

deleg ation

of

authority

when there are f actors over which he/she has

no control. We also f ind that

larg er-

and

hig her-g rowth

divisions tend to be more

decentralized.

While we took care to address

methodolog ical

concerns,

three caveats should be rec-

og nized

when

considering

the evidence in this

paper.

F irst,

we concede the

simplicity

of

the model. No

empirical study

can

investig ate

all

org anizational desig n

choices at the same

time.

Theref ore,

this is a

partial equilibriumstudy

in which

modeling

choices are inf ormed

by prior

research and

theory .

However,

there is a

potential

f or

specif ication

error in the

reg ression

and f or correlated omitted variables. There

may

be other determinants of

org a-

nization

desig n

choices and other control mechanisms that will inf luence decentralization

and

perf ormance

measurement choices. F or

example,

we do not have data on whether

perf ormance

measures are used in annual bonus

plans.

We

can, theref ore,

not test

directly

the inf luence of

compensation

contracts on metric use or decentralization. S econd is the

potential

f or measurement

error,

which is of ten associated with

survey

data that relies on

the

perceptions

of

respondents.

Measurement error af f ects the

consistency

of the

parameter

estimation of the structural model and its standard errors. We tried to minimize this

problem

by asking respondents

to

provide

"harder" data on

org anizational practices.

The use of

multi-item scales also

mitig ates

some of the measurement error concerns.

Nevertheless,

some of our data

may

be

subject

to measurement error.

Third,

there is a

possibility

of cross-

sectional

positive

serial correlation between our observations. If f irms

adopt

f irm-wide or-

g anizational desig n practices,

then

multiple

observations within one f irm

may

be correlated.

Industry -wide adoption

of

org anizational

routines

mig ht

not be

completely

controlled f or

in our

dummy specif ication.

It should be

noted, however,

that

any existing positive

serial

correlation would bias the standard errors of the

parameter

estimates downward.

Despite

these

caveats,

this

study

has the

potential

to contribute to our

understanding

of

control

sy stemdesig n

and the f actors that inf luence

corporate manag ement's

choices when

implementing

control

sy stems

into divisions. We extend

prior

literature

by examining

the

interrelation between decentralization and

perf ormance

measurement choices and also

by

assessing

the

joint

ef f ect of inf ormation

asy mmetry

and

interdependencies

on those choices.

The

Accounting Review, July 2004

563

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All use subject to JSTOR Terms and Conditions

564

Abernethy ,

Bouwens,

and van Lent

We f ind

strong

evidence f or the

importance

of inf ormation

asy mmetries

and

interdepen-

dencies as determinants of these choices.

F inally ,

we f ind some evidence that control choices

are interrelated.

APPENDIX

Instruments

1. Decentralization

(DECEN)

In this

section,

we would like

y ou

to

compare y our

inf luence with the inf luence of

y our

superior

on the

f ollowing

decisions.

i.

S trateg ic

decisions

(e.g ., development

of new

products;

enter and

develop

new mar-

kets;

y our

unit's

strateg y )

ii. Investment decisions

(e.g ., acquiring

new assets and

f inancing

investment

projects;

inf ormation

sy stems)

iii.

Marketing

decisions

(e.g ., campaig ns; pricing decisions)

iv. Decisions

reg arding

internal

processes (setting production/sales priorities; inputs

used and/or

processes employ ed

to f ill orders;

contracting input suppliers)

v. Human resources decisions

(e.g ., hiring /f iring ; compensation

and

setting

career

paths

f or the

personnel employ ed

within

y our

unit;

reorg anizing y our

unit;

crea-

tion of new

jobs)

If

y ou

and/or

any

of

y our

subordinates make the decision without the

knowledg e

of

y our supervisor, y ou

and/or others of

y our

unit are considered to have all inf luence.

My superior

and I have

My

unit about the

My superior

has all same has all

inf luence inf luence inf luence

i.

S trateg ic

decisions 1 2 3 4 5 6 7 n/o

ii. Investment decisions 1 2 3 4 5 6 7 n/o

iii.

Marketing

decisions 1 2 3 4 5 6 7 n/o

iv. Decisions

reg arding

internal 1 2 3 4 5 6 7 n/o

processes

v. Human resource decisions 1 2 3 4 5 6 7 n/o

2. Divisional

S ummary

Measures

(DS Ms)

Indicate the

weig hts y our supervisor assig ns

to each of these measures to assess

y our

unit's

perf ormance.

Your answers should total 100

percent.

i.

S tock-price-related

measures

%

ii. F irm-level

perf ormance

measures

(e.g .,

f irm

output,

f irm

ROI,

f irm

prof it

%

marg ins,

f irm

income)

iii. Measures

summarizing

the total

perf ormance

of

y our

unit

(e.g ., y our

%

unit's

income,

unit EVA or

ROI,

unit

output)

iv. Measures that

provide perf ormance

inf ormation on

specif ic aspects

%

within

y our

business unit

(e.g .,

R&D,

production ef f iciency

or

quality

prog rams,

unit

product

costs)

v. Other measures not mentioned

(please specif y )

%

Total 100%

The

Accounting Review, July

2004

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Determinants

of

Control

S y stemDesig n

in Divisionalized F irms

3. Alternative Perf ormance Measure Instruments

(PROF IT)

Indicate the

weig hts y our supervisor assig ns

to each of these measures to assess

y our

unit's

perf ormance.

Your answers should total 100

percent.

i.

S tock-price-related

measures %

ii. Prof it measures

(e.g .,

ROI,

prof it marg ins,

net

prof it)

%

iii. Cost measures

(e.g ., averag e

cost

price,

R&D

costs)

%

iv. Turnover measures %

v. Nonf inancial

perf ormance

measure

reg arding strateg y , marketing

and %

investments

(e.g .,

customer

satisf action,

market

share,

R&D

prog ress)

vi. Nonf inancial

perf ormance

measures related to internal

processes

%

reg arding personnel (e.g ., productivity , quality , coaching

and

training

projects)

vii. Other nonf inancial

perf ormance

measures

(please specif y )

%

Total 100%

4.

Interdependencies

This section relates to the

relationships

between

y our

unit and other

org anizational

units.

No A

very

impact

S ome

sig nif icant

at all

impact impact

(a)

To what extent 1 2 3 4 5 6 7 n/o

do

y our

unit's

actions

impact

on work carried

out in other

org anizational

units of

y our

f irm

(IMPACT-

THEM)

(b)

To what extent 1 2 3 4 5 6 7 n/o

do actions of

manag ers

of

other units of

the f irm

impact

work carriedout

in

y our

particular

unit

(IMPACT- YOU)

(c)

What

percentag e

of

y our

total

production

is deliveredto other

org anizational

units of

y our

f irm? %

(S UPPLY)

(d)

What

percentag e

of

y our

total

production

uses

inputs acquired

f romother

org anizational

units of %

y our

f irm?

(S UPPLY)

F or about

Not at half the F or all

all business business

(e)

To what extent 1 2 3 4 5 6 7 n/o

could

y our

org anizational

unit

operate

as a

stand-alone

business

(INDEP)

The

Accounting Review, July

2004

565

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Abernethv, Bouwens, and van Lent

(f )

How

long

would it take external

suppliers

to meet the demand of

y our

current internal customers?

(CHANGE)

1 2 3 4 5 6

They

can It would It would It would It would It would

deliver take themtake themtake themtake themtake them

without 1 month 2 months 3 months 4 months 5 months

delay

5. Inf ormation

Asy mmetries (INF ORAS YM)

My supervisor

is much more

f amiliar

1

(a) Compared

to

y our

superior,

who is in

possession

of better

inf ormation

reg arding

the

activities undertaken in

y our org anizational

unit?

(b) Compared

to

y our

superior,

who is more

f amiliar with the

input-

output relationships

inherent in the internal

operations

of

y our

org anizational

unit?

(c) Compared

to

y our

superior,

who is more

certain of the

perf ormance

potential

of

y our

org anizational

unit?

(d) Compared

to

y our

superior,

who is more

f amiliar

technically

with

the work of

y our

org anizational

unit?

2 3

1 2 3

My supervisor

is much more

certain

1

My supervisor

is much more

f amiliar

1 2 3

We are about

equally

f amiliar

4 5 6

4 56

We are about

equally

certain

4 5 6

We are about

equally

f amiliar

4 56

The

Accounting

Review,

July

2004

n/o 7

It would

take them

6 or more

months

n/o

n/o

n/o

I ammuch

more f amiliar

7

7

I ammuch

more certain

7

I ammuch

more f amiliar

7 n/o

566

2 3

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Determinants

of

Control S y stem

Desig n

in Divisionalized F irms

(e) Compared

to

y our

superior,

who is better

able to assess the

potential

impact

on

y our

activities

of f actors external to

y our

org anizational

unit?

(f ) Compared

to

y our

superior,

who has better

understanding

of what can

be achieved in

y our

org anizational

unit?

My supervisor

has a much

better

understanding

1 2 3

1 2 3

We have about

the same

understanding

I have a much

better

understanding

4 5 6 7 n/o

4 56 7 n/o

6. Growth

i. What is

y our

expectation

with

respect

to the

g rowth

opportunities

that exist

within the

industry

in

which

y ou compete?

ii. What is

y our

expectation

with

respect

to the

g rowth

opportunities y our

specif ic

unit f aces?

S trong

Decline

1 2 3

1 2 3

No

g rowth

4 5 6

4 56

S ig nif icant

increase

7 n/o

7 n/o

7.

S ensitivity (S ENS )

Please indicate the extent to which the

f ollowing perf ormance

measures reveal the

perf ormance

of

y our

unit in a

relatively timely

manner. If the

perf ormance

measures are all

equally timely

in

y our

unit,

then each measure

(i-iv)

receives 25

percent.

If one measure is

timelier,

then it will receive a

weig ht

of more than 25

percent.

Hence,

y our

answers should total 100

percent.

i.

S tock-price-related

measures %

ii.

Prof itability ,

cost or revenue measures

(e.g ., ROI,

prof it marg ins, income, %

production costs,

R&D

costs)

iii. Nonf inancial

perf ormance

inf ormation on

investments,

strateg y , marketing ,

%

internal

processes,

and human resources

iv. Other nonf inancial measures not mentioned

(please specif y )

%

Total 100%

8. Precision

Please indicate the extent to which the

f ollowing perf ormance

measures reveal the

perf ormance

of

y our

unit

accurately .

In this

context,

accurateness means that

y our

unit's ef f ort is well ref lected in

The

Accounting Review,

July

2004

567

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All use subject to JSTOR Terms and Conditions

Abernethy , Bouwens,

and van Lent

the

perf ormance

measure. We would like

y ou

to

compare

the accurateness of the measures below. If

the

perf ormance

measures are all

equally

accurate in

y our

unit,

then each measure

(i-v)

receives 20

percent.

If one measure is more

accurate,

then it will receive a

weig ht

of more than 20

percent.

Hence,

y our

answers should total 100

percent.

i.

S tock-price-related

measures %

ii. Measures

jointly summarizing

the

perf ormance

of

y our

and other units

(e.g .,

%

f irm-wide

prof it)

iii. Measures

summarizing

the total

perf ormance

of

y our

unit

(i.e., y our

unit's %

income,

total

output

of

y our unit)

iv. Measures that

provide perf ormance

inf ormation on

specif ic aspects

within

y our

%

org anizational

unit

(e.g ., R&D,

production ef f iciency

or

quality prog rams)

v. Other measures not mentioned

(please specif y )

%

Total 100%

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