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Determinants of Control System Design in Divisionalized Firms

Author(s): Margaret A. Abernethy, Jan Bouwens and Laurence van Lent


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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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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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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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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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).
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Accounting
Review,
July 2004
554
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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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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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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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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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