Du 2017

THE ACCOUNTING REVIEW American Accounting Association
Vol. 93, No. 1 DOI: 10.2308/accr-51763

January 2018
pp. 161–185
How Adopting New Performance Measures Affects

Subjective Performance Evaluations: Evidence from EVA
Adoption by Chinese State-Owned Enterprises
Downloaded from aaajournals.org by Kings College London-FWIC Journals on 08/30/19. For personal use only.
Fei Du
University of Illinois at Urbana–Champaign
David H. Erkens
Georgetown University
S. Mark Young
University of Southern California
The Accounting Review 2018.93:161-185.
Guliang Tang
University of International Business and Economics
ABSTRACT: This study investigates how adopting new performance measures affects the decision process through
which supervisors make subjective adjustments. In our setting, the Chinese government substituted economic value
added (EVA) for return on equity (ROE) in the performance score formula it uses to evaluate State-Owned
Enterprises (SOEs). In accordance with the Chinese government’s objective to increase the capital efficiency of
SOEs, supervisors shifted the weight in subjective adjustment decisions from ROE to EVA after EVA adoption.
Consistent with EVA adoption creating fairness concerns, however, supervisors did not penalize SOEs for
performing poorly on EVA when they performed well on ROE, and accomplished this by shifting the weight from EVA
back to ROE. Additional analyses suggest that personal preferences motivated supervisors to make these lenient
subjective adjustments. Overall, our findings indicate that adopting new performance measures creates fairness
concerns that motivate supervisors to consider their personal preferences in subjective adjustment decisions.
Keywords: leniency bias; fairness; performance measurement; subjectivity.
I. INTRODUCTION
S
ubjective adjustments can improve incentive contracting by allowing supervisors to take advantage of performance-
relevant information that becomes available during the contracting period (Gibbs, Merchant, Van der Stede, and Vargus
2004). Prior research suggests, however, that supervisors may not appropriately use such information in performance
evaluations after firms adopt new performance measures (Ittner, Larcker, and Meyer 2003). Although it is apparent from this
research that adopting new performance measures affects the decision process through which supervisors make subjective
adjustments, we know little about why and how this occurs. Answering these questions is of interest because adapting
performance measurement schemes to changes in firm strategy generally is viewed as essential for strategic change to result in
improved firm performance (Salter 1973; Govindarajan and Gupta 1985; Simons 1987; Kaplan and Norton 1996; Ittner,
We thank seminar participants at the 2016 AAA Management Accounting Section Midyear Meeting, City University of Hong Kong, The Hong Kong
University of Science and Technology, Maastricht University, Michigan State University, Nanyang Technological University, National University of
Singapore, Singapore Management University, The University of Hong Kong, The University of Melbourne, University of Illinois at Urbana–Champaign,
and especially Jasmijn Bol, Sarah Bonner, Jim Frederickson, Isabella Grabner, Chris Ittner, Chen Lin, Mark Nelson, Victor Maas, Karen Sedatole, Hun-
Tong Tan, Xin Wang, and two anonymous reviewers for their helpful suggestions and comments.
Editor’s note: Accepted by Christopher D. Ittner, under the Senior Editorship of Mark L. DeFond.
Submitted: July 2015
Accepted: March 2017
Published Online: April 2017
161
162 Du, Erkens, Young, and Tang
Larcker, and Rajan 1997). Accordingly, this paper investigates how the adoption of new performance measures affects the
decision process through which supervisors make subjective adjustments.
We propose that substituting a performance measure creates concerns about the perceived fairness of evaluations when
subordinates perform poorly on the new measure, but well on the old measure. We expect this performance differential to
trigger considerations of the fairness of the evaluation procedure because it is not only highly salient to subordinates (Folger,
Rosenfield, and Robinson 1983), but also has a potentially severe adverse effect on their evaluations (E. Seelau, S. Seelau,
Wells, and Windschitl 1995). Because individuals tend to attribute negative outcomes to external forces, we expect
subordinates to blame low performance evaluation outcomes on an unfair change in evaluation procedures, rather than on their
own actions (Schroth and Shah 2000).
Most importantly, we propose that these negative fairness perceptions motivate supervisors to consider their personal
preferences in subjective adjustment decisions. Prior research indicates that supervisors prefer outcomes they perceive to be fair
even when this does not benefit them (Maas, Van Rinsum, and Towry 2012). We expect supervisors to consider unfavorable
performance differentials between the old and new performance measure because notions of fairness are heavily influenced by
reference points (Kahneman, Knetsch, and Thaler 1986). Further, because the change in evaluation procedure is externally
imposed on subordinates, we expect that supervisors believe it is fair to be lenient (Lewicki and Bunker 1996). Moreover, we
argue that self-interest motivates similar behavior because lenient subjective adjustments help supervisors avoid confrontations
(Bol, Keune, Matsumura, and Shin 2010) and curry favor with subordinates (Du, Tang, and Young 2012). We argue that it is
more difficult for superiors of supervisors to detect self-serving behavior in our setting because the unfavorable performance
differential between the old and new performance measure makes it plausible that lenient evaluations are necessary to avoid
negative fairness perceptions that decrease productivity (Holtz 2015). Accordingly, we hypothesize that subjective adjustments
are less adversely affected by unfavorable performance on the new measure when the old measure is favorable.
We test our hypothesis using the archival records of the Chinese government’s performance evaluations of 82 State-Owned
Enterprises (SOEs) between 2007 and 2012 (429 firm-year observations). SOEs are of significant economic importance as they
account for approximately 43 percent of business activity and 85 percent of state bank loans in China (Cary 2013)—the world’s
second-largest economy (Bergmann 2015). The government agency that evaluates the largest SOEs1 is the State-Owned Assets
Supervision and Administration Commission (SASAC) of the State Council of China. We exploit a major change in how the
SASAC evaluates SOEs to test our hypothesis.
Specifically, in 2010, primarily to increase the capital efficiency of SOEs, the SASAC replaced return on equity (ROE)
with economic value added (EVA) as one of the four objective quantitative measures that are included in a formula that is used
to compute initial performance scores. The formula assigns points to SOEs based on whether they exceed or fall short of
performance targets. Because SOEs differ significantly from each other, performance targets are largely based on past
performance, and the formula limits the points SOEs can earn, the SASAC makes discretionary adjustments to the formula-
based performance score to encourage above-target performance. Specifically, when SOEs achieve target performance for a
specific performance measure, the points earned for that measure are increased up to 15 percent based on a subjective
evaluation of achieved performance levels. Although this subjective evaluation is based mostly on a list of suggested
performance measures, which includes ROE and EVA after EVA adoption, supervisors are allowed to use other relevant
information.2 Following prior research, we estimate the weights placed on various performance measures based on their
statistical associations with subjective adjustments (e.g., Ittner et al. 2003). Our empirical analysis considers all performance
measures that appear on the list suggested by the SASAC and controls for other factors that may influence subjective
adjustment decisions (e.g., industry and geographic factors).
Our findings indicate that, in accordance with the Chinese government’s objective to increase the capital efficiency of
SOEs, supervisors shift the weight in subjective adjustment decisions from ROE to EVA after EVA adoption. Furthermore,
after EVA adoption (but not before EVA adoption), subjective adjustments generally are lower when EVA is unfavorable.
Consistent with our hypothesis, however, this reduction is less pronounced when ROE is favorable. An additional analysis
suggests that supervisors accomplish this by shifting the weight in their subjective adjustment decisions from EVA back to
ROE, rather than by making a simple upward adjustment. In addition, robustness tests suggest that our findings are not driven
by any single department within the SASAC; how supervisors generally respond to conflicting outcomes between performance
measures; a desire to make post-EVA performance scores consistent with pre-EVA performance scores; or target ratcheting.
We also perform additional analyses that provide direct evidence for key elements of our theory. First, we split our post-
EVA sample into the adoption year and post-adoption year periods. This split is informative because, over time, as SOE and
1
By the end of 2012, our sample SOEs owned total assets worth 29 trillion RMB, had a profit of 1.3 trillion RMB, accounted for 2.5 percent of China’s
GDP, and represented 47 of the companies on the Fortune World 500 list.
2
In order to ensure that supervisors were able to consider EVA in their subjective adjustment decisions for all included SOE-year observations, we limit
our pre-EVA adoption sample to SOEs that participated in a voluntary EVA study.
The Accounting Review

Volume 93, Number 1, 2018
How Adopting New Performance Measures Affects Subjective Performance Evaluations 163
SASAC officials learn more about EVA, supervisors should be less concerned about the perception that EVA adoption has an
unfair negative impact on performance evaluations (Lind and Van den Bos 2002; Shaw, Wild, and Colquitt 2003). In addition,
they should be more concerned about being caught for making self-serving subjective adjustments (Crandall and Eshleman
2003; Demeré, Sedatole, and Woods 2015; Grabner, Künneke, and Moers 2016). Consistent with our findings resulting from
fairness concerns, our findings are more pronounced in the EVA adoption year. Second, we examine whether our results are
more pronounced for SOEs that, due to their political connections and geographic proximity to the SASAC, are more likely to
elicit fairness considerations (Hafer and Olson 2003), challenge evaluations (Bol et al. 2010), and exchange favors (Du et al.
2012). Consistent with our findings resulting from supervisors’ personal preferences, we find that our results are more
pronounced for this group of SOEs.
Our study contributes to the growing literature on subjective performance evaluations, and, more specifically, to the
literature considering how subjectivity affects the implementation of new performance measurement schemes (Frederickson,
Peffer, and Pratt 1999; Ittner et al. 2003). Existing research has shown that previous experience under a performance
measurement scheme affects subsequent evaluations, and suggests that this occurs because the mental representation
individuals use to make decisions or judgments is inflexible to changes in task demands (Krishnan, Luft, and Shields 2002).
Our findings lead us to the conclusion that this also occurs because supervisors are less likely to penalize subordinates for
performing poorly under the new performance measurement scheme when they perform well under the old performance
measurement scheme.
In addition, our theory and findings contribute to our understanding of how the use of subjectivity in evaluating employees
affects the leniency of performance evaluations. Existing research has identified various factors that predispose supervisors to
giving lenient performance evaluations, such as geographic proximity, hierarchical status, and social similarity (Bol et al. 2010;
Bol 2011; Du et al. 2012). Our results suggest that these factors have a more pronounced impact on subjective performance
evaluations when the adoption of new performance measures creates concerns about the perceived fairness of evaluations.
Additionally, while this research generally suggests that supervisors act on their personal preferences by making simple shifts
in performance ratings, our results suggest that they may primarily accomplish this by taking advantage of conflicting outcomes
between performance measures. The latter provides some of the first empirical evidence on discretion in performance
evaluations being constrained by the available performance data.
The remainder of the paper proceeds as follows. In the next section, we develop our research hypothesis. Section III
discusses the research setting, while Section IV describes how we select our sample and measure our variables. Section V
presents our empirical results, and Section VI concludes and suggests directions for future studies.
II. HYPOTHESIS DEVELOPMENT
Background on Subjective Adjustments

A key characteristic of most performance evaluation systems is the use of subjectivity in evaluating employees (Gibbs et
al. 2004). Subjectivity is widespread because objective quantitative measures often distort incentives and impose undue risk on
employees (Gibbs et al. 2004). Subjectivity improves incentive contracting by allowing firms to take advantage of
performance-relevant information that arrives during the contracting period (e.g., uncontrollable events). Firms can incorporate
this non-contracted information in performance evaluations by using subjective performance measures, allowing flexibility in
the weighting of objective performance measures, and making subjective adjustments to performance evaluations (Ittner et al.
2003). In this study, we focus on the use of subjective adjustments.
The use of subjective adjustments draws concern about whether non-contracted information is appropriately used in
performance evaluations (Baiman and Rajan 1995; Fisher, Maines, Peffer, and Sprinkle 2005). Such concerns loom especially
large when firms adopt new performance measures. Specifically, Ittner et al. (2003) describe how a firm’s implementation of a
new performance measurement scheme went awry because supervisors were inconsistent in applying relative weights to
performance measures and establishing performance criteria. Although it is apparent from their study that adopting new
performance measures affects the decision process through which supervisors make subjective adjustments, we know little
about why and how this occurs. Answering these questions is of interest because of the general belief that adapting performance
measurement schemes to changes in firm strategy is essential for strategic change to result in improved firm performance
(Kaplan and Norton 1996). Accordingly, this study examines how adopting new performance measures affects the decision
process through which supervisors make subjective adjustments.
Fairness Concerns
Prior research indicates that perceptions of unfairness in performance evaluation decrease job satisfaction, commitment,
task performance, and organizational citizenship behavior, and increase counterproductive work behavior, such as supervisor-

targeted aggression (Rupp, Shao, Jones, and Liao 2014). Subordinates perceive their compensation as unfair when they believe
that their compensation would have been higher if supervisors had used other procedures that could and should have been
implemented (Folger and Cropanzano 1998, 2001). Fairness perceptions have a more pronounced impact on workplace
behavior when subordinates are uncertain about how an organizational change affects them because fairness information helps
individuals reduce fear of being exploited in a social exchange (Lind and Van den Bos 2002).
In our setting, we expect fairness perceptions to significantly affect workplace behavior because the adoption of a new
performance measure inherently creates uncertainty about the evaluation procedure (Ittner et al. 2003). Moreover, we expect
subordinates to perceive their performance evaluation as unfair when the new performance measure is unfavorable and the old
performance measure is favorable. We expect this performance differential to trigger considerations of the fairness of the
evaluation procedure because it is not only highly salient to subordinates (Folger et al. 1983), but also has a potentially severe
adverse impact on their evaluations (Seelau et al. 1995). Further, we expect subordinates to hold supervisors responsible
because supervisors have considerable discretion (Folger and Cropanzano 2001) in how they make subjective adjustments
(Moers 2005; Bol 2011; Bol and Smith 2011) and ought to understand how the adoption of the new performance measure
affects performance evaluations (e.g., Karlovac and Darley 1988; Greenberg 1996). Finally, because individuals tend to
attribute negative outcomes to external forces (Miller and Ross 1975), we expect subordinates to attribute the resulting low
performance evaluation outcome to an unfair change in evaluation procedures, rather than their own actions (Schroth and Shah
2000).
Most importantly, as we explain next, we expect these negative fairness perceptions to motivate supervisors to consider
their personal preferences in subjective adjustment decisions.
Personal Preferences
Personal preferences influence subjective performance evaluations because, by their very nature, subjective evaluations are
based on personal impressions, feelings, and opinions that are difficult to verify by a third party (Bol 2008). We expect that not
only a preference for fair evaluations, but also self-interest motivates supervisors to make lenient subjective adjustments when
subordinates perform poorly on the new measure, but well on the old measure.
Prior research indicates that supervisors prefer outcomes they perceive to be fair, even if ensuring a fair outcome is costly
and provides neither present nor future material benefits (Maas et al. 2012). We expect supervisors to consider unfavorable
performance differentials between the old and new performance measures because notions of fairness are heavily influenced by
reference points (Kahneman et al. 1986), and the old performance measure, due to its former importance and recent use, is a
salient reference point (Schneider and Shiffrin 1977; Shiffrin and Schneider 1977). Further, because the change in evaluation
procedure is externally imposed on subordinates, we expect that supervisors believe it is fair to be lenient (Weiner, Amirkhan,
Folkes, and Verette 1987; Lewicki and Bunker 1996).
Self-interest affects subjective adjustments because supervisors are not the residual claimants of subordinates’ output and,
thus, do not bear the cost of inaccurate ratings (Prendergast and Topel 1996). In general, supervisors prefer giving lenient
evaluations because that allows them to avoid the ramifications of giving tough, but deserved, evaluations (Bol 2011). These
ramifications include loss of time, damaged relationships with subordinates, and subordinate criticism (Napier and Latham
1986; Lawler 1990; Murphy and Cleveland 1991, 1995). Moreover, giving lenient evaluations allows supervisors to ingratiate
themselves with subordinates (Du et al. 2012).
We believe that our setting provides fertile ground for this self-serving behavior to take root because supervisors can feign
fairness concerns as a pretext for making self-serving subjective adjustments. While supervisors have discretion to upwardly
adjust performance ratings based on subjective factors that they observe, we expect them to use this discretion only to the extent
that they believe this is justifiable to their superiors. Supervisors care about the justifiability of their evaluations because, in
general, individuals do not want to be perceived as acting selfishly (Snyder, Kleck, Strenta, and Mentzer 1979; Batson, Flink,
Schoenrade, Fultz, and Pych 1986; Crandall and Eshleman 2003). In addition, firms may monitor the accuracy of performance
evaluations and penalize supervisors when they find indications of self-serving behavior (Demeré et al. 2015; Grabner et al.
2016). We expect that it is difficult for superiors of supervisors to detect self-serving behavior in our setting because the
unfavorable performance differential between the old and new performance measures makes it plausible that lenient evaluations
are necessary to avoid negative fairness perceptions that decrease productivity (Colquitt et al. 2013; Holtz 2015).
Overall, we expect personal preferences to motivate supervisors to make more lenient subjective adjustments when the
new performance measure is unfavorable and the old performance measure is favorable. Prior research does not clearly
indicate, however, how supervisors will accomplish this. Some research suggests that supervisors will make simple upward
adjustments (Bol 2011; Bol and Smith 2011; Du et al. 2012), while other research suggests that supervisors will shift the weight
in their subjective adjustment decisions from the new performance measure to the old performance measure (Moers 2005).
Because both approaches suggest that subjective adjustments are, on average, less adversely affected by unfavorable

performance on the new performance measure when the old performance measure is favorable, we posit the following
hypothesis:
H: Subjective adjustments are less adversely affected by unfavorable performance on the new measure when the old
measure is favorable.
Before we conclude this section, we clarify two issues. First, our hypothesis development does not consider the relative
importance of fairness considerations and self-interest because they are not only equally plausible explanations, but also
difficult to distinguish from each other using archival data. In our empirical analysis, however, we do try to rule out that our
results are driven by factors other than supervisors’ personal preferences. Second, there is significant tension with respect to our
hypothesis because several arguments work against it. Specifically, subordinates may not be concerned about the fairness of the
new evaluation procedure because they perceive their supervisor as fair (Rodell and Colquitt 2009). Moreover, both
subordinates and supervisors may not be concerned about the fairness of performance evaluations because they believe that
their firm has convincingly explained the reasons and details of the new evaluation procedure (Lind and Van den Bos 2002).
Furthermore, because inaccurate evaluations come at a high cost to firms (Moers 2005), they monitor the accuracy of
performance evaluations and penalize supervisors that give inaccurate ratings (Demeré et al. 2015; Grabner et al. 2016). Thus,
our hypothesis is an empirical question that warrants study.
III. RESEARCH SETTING

The Chinese economy is the second-largest in the world, with a GDP of over $11 trillion (Bergmann 2015).3 Our research
domain is the state-owned enterprise (SOE) system in China that accounts for approximately 43 percent of business activity and
85 percent of state bank loans in China (Cary 2013). Thus, the SOE system is of global economic significance.
Although the Chinese government owns SOEs, they operate to some extent as independent entities. The State-Owned
Assets Supervision and Administration Commission (SASAC) was created in November 2002 to ensure that SOEs advance the
interests of the Chinese government. The SASAC accomplishes this by appointing auditors and board members; establishing
procedures for appointing managers; approving major decisions, including mergers, bankruptcies, the issuance of new
securities, and major new strategic initiatives; and reporting on SOEs’ performance to the Chinese government.4 Most
importantly, the SASAC also conducts annual performance evaluations of SOE managers that inform its bonus and personnel
decisions. Four departments within the SASAC, each consisting of four to eight individuals, perform these evaluations.
Because turnover within the SASAC is very low and SASAC officials specialize by industry, SOEs generally are evaluated by
the same individuals during our sample period.5
Although supervisors and SOE managers do not share a workplace, our setting resembles a typical performance evaluation
setting. As is generally the case, supervisors are not compensated for the accuracy of their performance evaluations (Murphy
and Cleveland 1991). Instead, their evaluations are monitored by the head of their department, senior officials within the
SASAC, and senior officials within the State Council of China.6 Moreover, supervisors frequently communicate with SOE
managers about the operations and management of SOEs (Du et al. 2012) and are responsible for communicating performance
evaluation results to SOE managers.
The primary data for this study are derived from these performance evaluations. We supplement the data with insights
drawn from in-depth field interviews with SASAC and SOE officials.
Performance Evaluation System

The SASAC bases its initial performance score on a formula that uses four objective performance measures. Two of these
performance measures are used across all SOEs and two are chosen by SOEs from a set of three other possible performance
measures. Even though SOEs differ significantly from each other, the formula only varies with respect to which two out of
three measures are chosen.7 The formula assigns points to SOEs based on whether they exceed or fall short of performance
targets. As illustrated in Appendix C, achieving above-target performance increases the number of points earned for a measure
by, at most, 20 percent. Performance targets are negotiated with SOE managers at the end of the previous performance period
3
The U.S. economy is the largest in the world, with GDP of over $18 trillion (Bergmann 2015).
4
We acknowledge that subjectivity can manifest itself in how the SASAC performs these roles. We do not examine this, however, because our
interviews suggest that EVA adoption primarily affected performance evaluations.
5
Interviews with SASAC officials suggest that there was very low employee turnover in the years surrounding EVA adoption, and no turnover in the
year of EVA adoption.
6
As one SASAC official noted, the Chinese government wants to avoid a situation in which ‘‘everyone eats the same portion from a big pot.’’
7
These measures are inventory turnover, receivables turnover, and sales growth.

and are subject to stringent guidelines. For example, they generally cannot be lower than past performance and are heavily
influenced by the Chinese government’s economic objectives (e.g., GDP growth). As a result, subjectivity does not play a
significant role in this component of SOEs’ performance evaluation.
Because SOEs differ significantly from each other, performance targets are largely based on past performance, and the
formula limits the points SOEs can earn, the SASAC makes discretionary adjustments to the formula-based performance score
to encourage above-target performance. Specifically, when SOEs achieve target performance for a specific performance
measure, the points earned for that measure are increased up to 15 percent based on a subjective evaluation of achieved
performance levels.8 Although this subjective evaluation is based mostly on a list of suggested performance measures, which
include ROE and EVA after EVA adoption, supervisors are allowed to use other relevant information. Because there is no
formal policy on how this subjective evaluation should be made, supervisors have considerable flexibility in whether and how
they consider the various performance measures in their subjective adjustment decisions.
Subsequently, the SASAC makes adjustments based on subjective performance measures that are entirely unrelated to the
performance score formula. Specifically, the SASAC deducts points for severe safety incidents, financial fraud, and other types
of scandals. In addition, it adds points for acquisitions of financially distressed SOEs that advance the Chinese government’s
interests.
Finally, the SASAC subjectively determines cutoffs for overall performance ratings: A (highest), B, C, D, and E (lowest).9
A score of ‘‘C’’ or above is considered acceptable. SOE managers who receive a lower performance rating are either asked to
resign from their current position or have to submit plans that detail how they expect to improve their SOE’s performance. This,
however, rarely happens. Our field interviews suggest that for SOE managers, it is of great importance to obtain an A rating.
SOE managers believe that obtaining such a rating is a great honor. The SASAC reinforces this honor by publishing an annual
list of A-rated SOEs. See Appendix C for an overview of the SASAC’s performance measurement system and Appendix D for
a detailed example.
Change in the Performance Measurement System

Until 2009, the SASAC used earnings before taxes and extraordinary items (EBT) and return on equity (ROE) in its
performance score formula across all SOEs. Beginning in 2010, the SASAC replaced ROE with EVA. EVA equals net
operating profit after tax less the cost of capital. The underlying concept is that investors require a rate of return that
compensates them for the use of their capital or the equivalent of their opportunity cost, and the level of risk undertaken. EVA
was developed by Stewart (1991)10 based on an earlier construct known as residual income (RI) developed by Edwards and
Bell (1961). The main calculative difference between RI and EVA is on the determination of projected revenues. EVA includes
more adjustments to the accounting measure of earnings. See Appendix B for further details on how the SASAC computes
EVA.
The SASAC switched primarily to EVA in order to increase the capital efficiency of SOEs.11 SOEs have often been
criticized for being the recipients of below-cost financing because banks themselves are stated-owned, and are directed to let
credit flow to other SOEs. As a result, SOEs pay lower rates for borrowing and are less concerned about their ability to pay
back loans (Cary 2013). Most importantly, SOEs have long been accused of squandering resources. For instance, many SOEs,
most notably, those in the steel industry, have made investments in capacity without considering the economy’s need for their
product. As a result, the Chinese economy has been plagued with massive overcapacity (Roberts 2013).
The Vice Director of the SASAC, Mr. Shuhe Huang, explained the rationale for adopting EVA as follows:
Central SOEs should not over-spend state capital. Projects with returns lower than the cost of capital cannot be
approved . . . This return has to be at least higher than bank loan interest. (Zhao 2010)
According to the SASAC, the switch to EVA has significantly improved SOEs’ investment policies. As Mr. Shuhe noted:
Central SOEs have been more cautious in investment in the post EVA period. Before EVA adoption, all central SOEs
were thirsty for more financial capital and more investment each year. Now the situation has changed. Firms are more
hesitant when proposing projects with returns lower than the required cost of capital. (Huang 2010)
8
Supervisors use the same percentage for all performance measures for which the target has been achieved.
9
The SASAC does not use a forced ranking system and, thus, there is no requirement that a set number or percentage of SOEs must fall in each rating
category. In our sample, the lowest rating is a D.
10
Stern Stewart advises SASAC on EVA.
11
The SASAC also uses EVA to focus SOEs on their main line of business and encourage investment in research and development. It accomplishes this
by discounting income from non-core business activities and adding back research and development expenditures to operating profit in its EVA
calculations. See Appendix B for further details on how the SASAC computes EVA.

Some central SOEs have started to estimate project-level EVAs before launching such projects. When they are
designing the budget, if a project requires 10 billion financial capital and only brings in 0.1 billion of EVA, or even
negative EVA, these SOEs would not initiate such a project.
Thus, the SASAC sought to fundamentally overhaul how SOEs are evaluated when it replaced ROE with EVA in 2010. Its
goal was to refocus SOEs on increasing capital efficiency rather than increasing profitability growth, which, for many years,
had been the main focus of SOE managers. Next, we discuss how the senior leadership of the SASAC prepared SASAC and
SOE officials for the adoption of EVA.
EVA Adoption Preparations

The SASAC went to great lengths to ensure that SASAC and SOE officials were ready for EVA adoption. The SASAC
disseminated various publications, including training manuals, hosted seminars and training workshops, and organized field
trips to allow SASAC and SOE officials to learn from the experiences of companies in other countries that successfully
implemented EVA. One SASAC official provided the following example from anonymous responses to research questions:
We have been studying the ‘‘wealth added’’ performance measure of Singapore’s Temasek Holdings Pte. Ltd. for
several years. This ‘‘wealth added’’ performance measure is by essence capturing economic value added. We
organized several field trips for SASAC officials and central SOE executives to study the Temasek’s system.
The SASAC ensured that all parties involved were aware of the importance of adopting EVA by emphasizing the benefits
of EVA in media interviews and official government publications, such as reports to the State Council. Thus, SASAC and SOE
officials had both technical knowledge of EVA and were aware of its importance by the time that it was adopted in 2010.12
Nevertheless, SASAC officials were concerned that SOEs would complain about the fairness of their evaluations when
they performed poorly on EVA, but well on ROE, which was an important benchmark due to its former importance and recent
use.13 Of significance, and consistent with our theory, SASAC officials preempted these complaints by putting more emphasis
on ROE in their subjective adjustment decisions. As one SASAC official noted:
From an ideal perspective, the replacement is thorough and complete. However, from a practical perspective, ROE
may still be considered in the evaluation. This is because in the initial period of adoption, to avoid the complaints from
some central SOEs, we may take a balanced view on the performance results inferred from these two performance
measures. Especially when some SOEs have poor EVA performance, we may take a look at ROE.
Overall, then, SASAC officials were concerned about how EVA adoption affected the perceived fairness of their
evaluations, particularly when SOEs performed poorly on EVA, but well on ROE. Pertinent to our study, SASAC officials
preempted potential negative responses from SOEs by changing their approach for making subjective adjustments.14 Thus, our
setting offers a unique opportunity for examining how adopting new performance measures affects the decision process through
which supervisors make subjective adjustments.15
IV. SAMPLE SELECTION AND VARIABLE DEFINITION
Sample Selection
The sample consists of 82 unique SOEs and 429 SOE-year observations that were evaluated by the SASAC from 2007
until 2012. To be included in our sample, an SOE has to satisfy the following two criteria. First, SOEs must have performance
evaluation and EVA data available from a database maintained by the SASAC. We use the SASAC’s EVA data because
publicly available data are not detailed enough for us to make accurate EVA calculations on our own. This data restriction does
not limit our sample to the post-EVA adoption period because most SOEs participated in a voluntary EVA study that was
performed in the three years preceding EVA adoption. Of note is that this data restriction also ensures that supervisors were
12
Starting in 2007 until EVA was officially adopted in 2010, the SASAC performed a voluntary EVA study that provided SOE and SASAC officials with
EVA data that went back to 2003. Although these data were not supposed to be used in performance evaluations, they did give officials from SOEs and
the SASAC significant direct experience with EVA before its adoption in 2010. An interview with a SASAC official suggests that SOEs did not change
their investment behavior based on this knowledge, and only started to become concerned about their EVA once EVA was formally adopted in 2010.
13
One SASAC official went as far to say that he felt ‘‘a strong psychological attachment’’ to ROE.
14
Our interviewees indicated that there was no official policy that encouraged SASAC officials to put more emphasis on ROE and less emphasis on EVA
when SOEs performed poorly on EVA, but well on ROE.
15
Interviews with SASAC officials rule out that our findings are driven by concurrent changes in other practices that may influence performance
evaluations, such as the retention, compensation, and monitoring of SASAC officials.

able to consider EVA in their subjective adjustment decisions for all included SOE-year observations. Second, SOEs must have
financial data available from Wind Datafeed service (hereafter, WIND). We supplement these data with information on
financial misconduct, workplace accidents, acquisitions, GDP growth, and provincial development levels from various sources,
including China Stock Market and Accounting Research (CSMAR),16 government agencies, and internet searches.
Dependent Variable
We use the percentage with which performance scores are subjectively adjusted as our dependent measure (Subjective
Adjustment). We do not use overall ratings because these ratings are affected by the subsequent evaluation of subjective
performance measures and, ultimately, subjectivity in how cutoffs for overall performance scores are chosen.17 Consistent with
prior research, we estimate the weights placed on various performance measures based on their statistical associations with
Subjective Adjustment (e.g., Ittner et al. 2003). In order to facilitate comparisons between these implicit weights, we standardize
all continuous SOE-level independent measures by year such that they have a mean of 0 and standard deviation of 1.
Explanatory Variables
Unfavorable EVA and Favorable ROE
We focus our empirical analysis primarily on how subjective adjustments are affected by the combination of unfavorable
EVA performance with favorable ROE performance. Our hypothesis suggests that subjective adjustments are less adversely
affected by unfavorable EVA performance when ROE performance is favorable. In order to examine this prediction, we
construct a performance benchmark that equals the lower of the following two values: (1) last year’s achieved performance; and
(2) the average of the prior three years’ achieved performance. Subsequently, we create two indicator variables that capture,
respectively, whether EVA (Unfavorable EVA) is below and ROE is above this benchmark (Favorable ROE).18 We do so
because, as explained above and in Appendix C, performance targets are largely based on our performance benchmark, and
individuals are cognitively attuned to coding outcomes as either gains or losses relative to some salient reference point
(Kahneman and Tversky 1979).
Control Variables
We include five sets of control variables that may influence the SASAC’s subjective adjustment decisions. These control
variables are defined in Appendix A. First, we control for the performance measures used in the performance score formula:
return on equity (ROE), economic value added (EVA), earnings before taxes and extraordinary items (EBT), inventory turnover
(Inventory Turnover), receivables turnover (Receivables Turnover), and sales growth (Sales Growth). Second, we control for all
other measures that the SASAC suggests its supervisors consider in their subjective adjustment decisions: asset turnover (Asset
Turnover), leverage (Leverage), firm size (Log(Assets)), and workforce size (Log(Employees)). Third, we control for
performance on the subjective performance measures. Specifically, we include three dichotomous variables that capture
whether during the fiscal year, SOEs were accused of financial misconduct (Misconduct), had workplace accidents (Accident),
and acquired other SOEs (Acquisition). Fourth, we control for GDP growth (National GDP Growth) and the development level
of the province in which SOEs are headquartered (Province Development Level). Finally, we include industry indicators to
control for factors that vary at the industry level, such as the strategic importance of an industry to the Chinese government and
the department within the SASAC that conducts performance evaluations.
Figure 1 plots how ROE and EVA evolved over time during our sample period. In order to construct this figure, we
aggregate the financials of all SOEs by year before computing ROE and EVA. Consistent with the 2007–2008 financial crisis
having had an adverse effect on Chinese SOEs, the graph shows that ROE and EVA declined dramatically in 2008, and
gradually increased from 2009 until 2011. According to interviews with SOE and SASAC officials, this increase was largely
fueled by the 4 trillion RMB economic stimulus plan that was announced by the State Council of China in November of 2008.
According to our interviewees, this upward trend lasted only until 2011 because decreases in commodity prices deteriorated the
performance of many SOEs in 2012. Of note is that, consistent with EVA adoption having made SOEs more capital-efficient,
the figure shows that after 2009, the increase in EVA is much more pronounced than the increase in ROE.
16
Although CSMAR exclusively collects data on publicly listed companies, it is a useful source of information on financial misconduct, as many SOEs
are ultimate owners of publicly listed companies. Our sample SOEs own 292 companies listed in Shanghai, Shenzhen, and Hong Kong.
17
In an untabulated analysis, we find a strong association between our dependent measure (Subjective Adjustment) and overall performance ratings
(correlation coefficient ¼ 0.750, p , 1 percent). Thus, decisions that affect our dependent measure also influence an SOE’s overall performance rating.
18
These indicators are based on unstandardized data.

FIGURE 1
SOE Performance
This figure plots aggregate SOE performance over time. We compute these statistics by aggregating the financials of all SOEs by year before computing
ROE and EVA. For example, ROE equals aggregate net income scaled by aggregate common equity.
Panel A of Table 1 presents (unstandardized) descriptive statistics for the measures used for testing our hypothesis for the
pre- and post-EVA period. Consistent with our hypothesis, the panel shows that Subjective Adjustment increased significantly
after the SASAC adopted EVA in 2010. Specifically, subjective adjustments increase, on average, by 1.346 percentage points,
which is economically significant given that supervisors are permitted to increase the formula-based performance score by, at
most, 15 percentage points. Panel B provides a breakdown of our sample SOEs by SASAC department and industry. This panel
shows that some departments within the SASAC are responsible for supervising a larger number of SOEs than others and that
our sample is not concentrated in any given industry, although some industries are more heavily represented than others.
Finally, Panel C provides correlation coefficients of the measures used in our main analysis separately for the pre-EVA (2007–
2009) and post-EVA (2010–2012) adoption periods. The panel shows that while ROE is significantly associated with EVA in
the post-EVA adoption period, the magnitude of this correlation is modest (0.278).19 Thus, even though ROE and EVA are
clearly related, they measure separate aspects of SOEs’ performance.
V. EMPIRICAL RESULTS
Primary Results
We start our empirical analysis by examining how the implicit weights on ROE and EVA in subjective adjustment
decisions changed after EVA adoption. In order to accomplish this, we split our sample into the pre- and post-EVA adoption
periods, and regress Subjective Adjustment on our control variables. The results of this analysis are presented in Table 2. In
accordance with the Chinese government’s objective to increase the capital efficiency of SOEs, Table 2 shows that the
coefficient on ROE decreases and the coefficient on EVA increases after EVA adoption. Both changes in coefficient estimates
are not only statistically significant at p , 5 percent (two-tailed), but also economically significant. Specifically, after EVA
adoption, a one-standard-deviation change in ROE has a 0.794 percentage point (0.580 1.374) smaller impact on
subjective adjustments, and a one-standard-deviation change in EVA has a 0.516 percentage point (0.339 þ 0.177) larger
impact on subjective adjustments.20 Of note is that the high R2 for the pre-EVA adoption period (0.945) suggests that our
regression model closely approximates the process through which the SASAC made subjective adjustment decisions before
EVA adoption. Consistent with EVA adoption having changed this relatively simple decision-making process by adding
19
All variance inflation factors are well below (range 1.09 to 2.85) the standard critical value of 10 (Kennedy 1992).
20
The coefficients on the other measures that the SASAC suggests that its supervisors use in subjective adjustment decisions do not significantly differ
between the pre- and post-EVA adoption periods.

170
TABLE 1
Descriptive Statistics
Panel A: Pre- versus Post-EVA Period
Pre-EVA Period Post-EVA Period
(n ¼ 207) (n ¼ 222) Difference
Std. Std.
Mean Median Dev. Mean Median Dev. Mean Median
Dependent Variables
Subjective Adjustment 7.962 8.346 3.262 9.308 9.630 2.93 1.346*** 1.284***
Independent Variables
Unfavorable EVA (indicator) 0.551 1.000 0.499 0.329 0.000 0.471 0.222*** 1.000***
Favorable ROE (indicator) 0.406 0.000 0.493 0.559 1.000 0.498 0.153*** 1.000***
ROE 0.092 0.085 0.252 0.080 0.090 0.101 0.012 0.005
EVA (in 100 million RMB) 26.347 3.060 108.674 35.400 4.804 128.040 9.053 7.864***
Control Variables
EBT 47.315 8.498 17.102 80.721 22.400 11.306 33.406** 13.902***
Inventory Turnover 9.535 5.775 11.724 9.732 6.085 14.499 0.197 0.310
Receivables Turnover 19.164 12.885 19.238 23.021 13.960 31.230 3.858 1.075
Sales Growth 1.153 1.157 0.255 1.225 1.205 0.233 0.073*** 0.048***
Asset Turnover 0.935 0.658 1.136 1.015 0.691 1.379 0.080 0.033
Leverage 0.662 0.665 0.161 0.671 0.686 0.132 0.009 0.021
Log (Assets) 5.885 6.051 1.893 6.660 6.970 1.710 0.779*** 0.609***
Log (Employees) 10.955 11.165 1.004 10.978 11.395 1.031 0.023 0.230
Misconduct 0.027 0.000 0.186 0.023 0.000 0.150 0.004 0.000
Accident 0.067 0.000 0.319 0.069 0.000 0.254 0.002 0.000
Acquisition 0.289 0.000 0.396 0.272 0.000 0.448 0.017 0.000
National GDP Growth 9.355 9.600 2.290 9.194 9.300 1.110 0.161*** 0.300***
Province Development Level 9.527 9.580 0.901 9.704 9.870 0.890 0.177** 0.290***
Panel B: Distribution of Unique SOEs by SASAC Department and Industry (n ¼ 82)

SASAC Department and Industry Frequency Percentage
General Office:
Military 10 12.20
Travels 1 1.22
Section I:
Chemical Engineering 1 1.22
Coal 1 1.22
Machinery 8 9.76
Metallurgical 6 7.32
Petroleum 3 3.66

Du, Erkens, Young, and Tang

(continued on next page)
TABLE 1 (continued)
SASAC Department and Industry Frequency Percentage
Section II:
Commerce and Trade 12 14.63
Construction 10 12.20
Research 4 4.88
Section III:

Agriculture 1 1.22
Electric Power 9 10.98

Electronics 2 2.44
Investment 2 2.44
Others 1 1.22
Real Estate 2 2.44
Telecom 1 1.22
Transportation 8 9.76
Panel C: Correlation Coefficients—Pre- and Post-EVA Adoption

Pre-EVA Adoption (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
(1) Unfavorable EVA 0.293 0.243 0.139 0.067 0.026 0.036 0.226 0.055 0.088 0.081 0.014 0.015 0.020 0.024 0.054 0.017
(2) Favorable ROE 0.418 0.191 0.103 0.172 0.091 0.133 0.236 0.005 0.072 0.113 0.132 0.010 0.114 0.040 0.218 0.043
(3) ROE 0.113 0.196 0.278 0.174 0.078 0.149 0.372 0.181 0.142 0.002 0.013 0.191 0.007 0.021 0.192 0.072
(4) EVA 0.104 0.216 0.084 0.501 0.041 0.107 0.053 0.045 0.315 0.321 0.213 0.032 0.307 0.033 0.012 0.053
(5) EBT 0.121 0.065 0.001 0.492 0.032 0.094 0.040 0.075 0.408 0.489 0.323 0.041 0.377 0.125 0.016 0.067
(6) Inventory Turnover 0.016 0.095 0.011 0.090 0.023 0.468 0.002 0.194 0.004 0.139 0.099 0.031 0.059 0.089 0.005 0.196
(7) Receivables Turnover 0.120 0.129 0.019 0.132 0.133 0.170 0.158 0.195 0.111 0.070 0.120 0.064 0.029 0.140 0.003 0.087
(8) Sales Growth 0.231 0.122 0.027 0.104 0.058 0.058 0.044 0.164 0.091 0.066 0.015 0.054 0.015 0.054 0.374 0.105
(9) Asset Turnover 0.119 0.089 0.073 0.029 0.023 0.079 0.232 0.031 0.026 0.284 0.063 0.011 0.254 0.215 0.086 0.135
(10) Leverage 0.018 0.262 0.162 0.413 0.426 0.086 0.092 0.095 0.002 0.155 0.230 0.017 0.194 0.185 0.036 0.050
How Adopting New Performance Measures Affects Subjective Performance Evaluations
(11) Log (Assets) 0.041 0.046 0.041 0.556 0.463 0.124 0.170 0.061 0.235 0.115 0.469 0.153 0.171 0.050 0.056 0.023
(12) Log (Employees) 0.011 0.007 0.038 0.465 0.368 0.067 0.206 0.008 0.044 0.100 0.603 0.036 0.057 0.025 0.013 0.240
(13) Misconduct 0.038 0.094 0.061 0.077 0.020 0.021 0.012 0.025 0.097 0.019 0.009 0.055 0.042 0.049 0.100 0.021
(14) Accident 0.060 0.099 0.037 0.514 0.471 0.089 0.096 0.054 0.226 0.344 0.186 0.058 0.065 0.016 0.049 0.072
(15) Acquisition 0.031 0.158 0.044 0.036 0.023 0.065 0.020 0.074 0.159 0.153 0.055 0.028 0.096 0.064 0.052 0.016
(16) National GDP Growth 0.254 0.164 0.081 0.037 0.084 0.113 0.021 0.181 0.054 0.055 0.040 0.021 0.016 0.023 0.092 0.013
(17) Province Development Level 0.114 0.206 0.016 0.031 0.019 0.113 0.048 0.128 0.200 0.014 0.031 0.042 0.037 0.089 0.108 0.313
**, *** Indicate two-tailed statistical significance at the 5 percent and 1 percent levels, respectively.
This table’s descriptive statistics are based on a sample of 82 SOE firms that were evaluated by the SASAC during the period 2007–2012 (429 SOE-year observations). Panel A presents descriptive
statistics of the measures used in our main analysis separately for the pre- (2007–2009) and post-EVA periods (2010–2012), and Panel B provides a breakdown of our sample SOEs by SASAC
department and industry. Panel C presents correlation coefficients of the measures used in our main analysis separately for the pre-EVA (left diagonal) and post-EVA (right diagonal) periods. All
absolute correlation coefficients larger than 0.100 are statistically significant at p , 0.10 (two-tailed). Two-sample t-tests are used to test differences in means, and Wilcoxon two-sample tests are used to
test differences in medians.
See Appendix A for variable definitions.
171
TABLE 2
Impact of EVA Adoption on the Implicit Weights on ROE and EVA
(1) (2)
Pre-EVA Adoption Post-EVA Adoption
Coefficient Coefficient
Explanatory Variable (t-statistic) (t-statistic)
ROE 1.374*** 0.580**
(4.119) (2.507)
EVA 0.177 0.339***

(1.295) (3.095)
EBT 0.277* 0.570***
(1.834) (7.554)
Inventory Turnover 0.358* 0.075
(1.837) (0.403)
Receivables Turnover 0.025 0.122
(0.152) (1.167)
Sales Growth 0.009 0.085
(0.077) (0.780)
Asset Turnover 0.298 0.301
(0.949) (1.490)
0.188 0.047
Leverage
(1.259) (0.364)
Log (Assets) 2.439*** 1.958***
(12.355) (8.173)
Log (Employees) 0.021 0.020
(0.331) (0.150)
Misconduct 0.025 0.148
(0.489) (1.644)
Accident 0.017 0.008
(0.222) (0.125)
Acquisition 0.142 0.015
(1.193) (0.205)
National GDP Growth 0.200 0.095
(1.321) (0.540)
Province Development Level 0.001 0.108
(0.014) (1.431)
Industry Fixed Effects Yes Yes
n 207 222
R2 0.945 0.786
*, **, *** Indicate two-tailed statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively.
This table presents the results of an analysis that examines how the implicit weights on ROE and EVA in subjective adjustment decisions changed from the
pre-EVA (2007–2009) to the post-EVA (2010–2012) adoption period. The results of this table are based on SOE firms that were evaluated by the SASAC
from 2007 until 2012. All continuous SOE-level independent measures are standardized by year such that they have a mean of 0 and standard deviation of
1. To control for residual dependence in our pooled time-series cross-sectional regressions, we cluster standard errors at the SOE level.
See Table 1 for more details on our sample and Appendix A for variable definitions.
other considerations, the R2 for our regression model decreases markedly from the pre-EVA (0.945) to the post-EVA (0.786)
adoption period.
Our hypothesis suggests that subjective adjustments are less adversely affected by unfavorable EVA performance when
ROE performance is favorable. In order to test this prediction, we add to our regression model an indicator that captures
unfavorable EVA performance (Unfavorable EVA), an indicator that captures favorable ROE performance (Favorable
ROE), and the interaction between these two indicators (Unfavorable EVA 3 Favorable ROE). Because we control for
differences in the level of SOEs’ performance, the coefficient on the interaction term captures the average effect of how
supervisors modify their subjective adjustment decisions when unfavorable EVA performance conflicts with favorable ROE
performance. Our hypothesis suggests that this average effect is positive. Consistent with this expectation, Column (2) of

Table 3 shows that the coefficient on Unfavorable EVA 3 Favorable ROE is not only positive and statistically significant (p
, 5 percent, two-tailed), but also economically significant. Specifically, SOEs with unfavorable EVA performance get a
1.181 percentage point higher subjective adjustment when they have favorable ROE performance. Consistent with this
finding resulting from EVA adoption, Column (1) of Table 3 shows that that the coefficient on Unfavorable EVA 3
Favorable ROE is statistically insignificant (p . 10 percent, two-tailed) before EVA adoption.21
Next, we examine how supervisors increase the leniency of their subjective adjustments. As mentioned previously,
supervisors can accomplish this by making a simple upward adjustment (Bol 2011; Bol and Smith 2011; Du et al. 2012), or by
shifting the weight in their subjective adjustment decisions from the unfavorable EVA measure to the favorable ROE measure
(Moers 2005). In order to examine which approach supervisors use, and to avoid complex triple interactions, we split our post-
EVA adoption sample based on whether SOEs have favorable or unfavorable ROE performance, and drop Favorable ROE
from our regression model. Further, to examine whether supervisors make more lenient subjective adjustments by shifting the
weight from the unfavorable EVA measure to the favorable ROE measure, we interact Unfavorable EVA with ROE and EVA. If
supervisors increase the leniency of their subjective adjustments by shifting the weight from the unfavorable EVA measure to
the favorable ROE measure, then we expect the coefficient on Unfavorable EVA 3 ROE to be positive and the coefficient on
Unfavorable EVA 3 EVA to be negative when ROE is favorable, but not when ROE is unfavorable. Moreover, if supervisors
increase the leniency of their evaluations by making a simple upward adjustment, then we expect the coefficient on
Unfavorable EVA to be less negative when ROE is favorable, than when ROE is unfavorable.
The results of the above-mentioned analysis are presented in Table 4. Consistent with supervisors shifting the weight in
their subjective adjustment decisions from EVA to ROE, Column (1) of Table 4 shows that the coefficient on Unfavorable EVA
3 EVA is negative (p , 5 percent, two-tailed) and the coefficient on Unfavorable EVA 3 ROE is positive (p , 5 percent, two-
tailed). Consistent with our hypothesis, Column (2) shows that these interactions are statistically insignificant when ROE is
unfavorable.22 In addition, consistent with supervisors also making a simple upward adjustment, the main effect of Unfavorable
EVA is less negative when ROE is favorable (0.203 versus 1.092). This difference, however, is not statistically significant (p
. 10 percent, two-tailed). Thus, it appears that supervisors increase the leniency of their subjective adjustments primarily by
shifting the weight in their subjective adjustment decisions from EVA to ROE.
Additional Analyses
Our theory posits that EVA adoption creates concerns about the perceived fairness of evaluations when SOEs perform
poorly on EVA, but well on ROE. Further, these fairness concerns motivate supervisors to consider their personal preferences
in subjective adjustment decisions. In this section, we provide direct evidence for these key elements of our theory. First, we
test whether our findings are driven by fairness concerns. Second, we test whether our findings are driven by supervisors’
personal preferences, rather than some other factor.
Fairness Concerns
Recall that fairness perceptions have a more pronounced impact on workplace behaviors when subordinates are uncertain
about how an organizational change affects them (Lind and Van den Bos 2002). Because the provision of adequate
explanations for performance evaluations reduces this uncertainty over time (Shaw et al. 2003), supervisors should be less
concerned about the perceived fairness of their evaluations in the years following the EVA adoption year. Moreover, this also
implies that a supervisor’s superior is less likely to accept feigned fairness concerns as an excuse for giving lenient performance
evaluations in the years following the EVA adoption year. Thus, regardless of whether our findings result from a preference for
fair evaluations or self-interest, they should be less pronounced in the years following the EVA adoption year.
In order to test this, we repeat our main analysis separately for the EVA adoption year and the period following the EVA
adoption year. In concert with our findings resulting from concerns about how EVA adoption affected the perceived fairness of
performance evaluations, the coefficient on Unfavorable EVA 3 Favorable ROE is positive and statically significant (p , 5
percent, two-tailed) in the EVA adoption year, and statistically insignificant (p . 10 percent, two-tailed) in the period
following the EVA adoption year23 (see Table 5).
21
The difference in the coefficient on the interaction term between the pre- and post-EVA adoption periods is statistically significant at p , 5 percent
(two-tailed).
22
The differences in the coefficients on the interaction terms between the favorable ROE and unfavorable ROE samples are statistically significant at p ,
5 percent (two-tailed).
23
Because we have the actual performance targets for 2010, but not for other years, we repeated the analysis presented in Column (2) of Table 5 using
actual performance targets. We find qualitatively similar results (results not tabulated). Thus, it appears that our findings are not unduly influenced by
the use of approximate, as opposed to actual, performance targets for classifying EVA and ROE performance as favorable or unfavorable.

TABLE 3
Subjective Adjustments when Unfavorable EVA Conflicts with Favorable ROE
(1) (2)
Pre-EVA Adoption Post-EVA Adoption
Unfavorable EVA 0.382 0.715**
(1.056) (2.149)
Favorable ROE 0.413 0.247

(1.469) (1.108)
Unfavorable EVA 3 Favorable ROE 0.047 1.181**
(0.098) (2.172)
ROE 1.294*** 0.633***
(3.834) (2.745)
EVA 0.156 0.260**
(1.116) (2.262)
EBT 0.360** 0.536***
(2.324) (6.708)
(1.762) (0.290)
0.027
Receivables Turnover 0.121

(0.166) (1.175)
(0.236) (0.691)
Asset Turnover 0.280 0.351*
(0.895) (1.717)
Leverage 0.211 0.053
(1.411) (0.407)
Log (Assets) 2.449*** 1.909***
(12.376) (7.954)
(0.382) (0.184)
(0.461) (1.623)
(0.592) (0.193)
(1.455) (0.081)
(1.258) (0.628)
Province Development Level 0.015 0.129*
(0.199) (1.715)
n 207 222
R2 0.947 0.793
This table presents our main results of how EVA adoption affects the process through which supervisors make subjective adjustment decisions.
Specifically, the table presents the results of an analysis that examines whether the adverse impact of unfavorable EVA performance (Unfavorable EVA) is
less pronounced when ROE performance is favorable (Favorable ROE). Column (1) presents the results for the pre-EVA adoption period, and Column (2)
presents the results for the post-EVA adoption period. All continuous SOE-level independent measures are standardized by year such that they have a
mean of 0 and standard deviation of 1. To control for residual dependence in our pooled time-series cross-sectional regressions, we cluster standard errors
at the SOE level.

TABLE 4
Lenient Subjective Adjustments
Simple Adjustments versus Weighting Decisions
(1) (2)
Favorable ROE Unfavorable ROE
Unfavorable EVA 0.203 1.092
(0.990) (1.306)
ROE 1.523*** 0.763
(3.353) (0.621)
EVA 0.344** 0.419**
(2.065) (2.172)
ROE 3 Unfavorable EVA 1.040** 0.662
(2.206) (0.469)
EVA 3 Unfavorable EVA 0.345** 0.817
(2.489) (0.416)
EBT 0.417*** 0.683***
(3.287) (4.694)
Inventory Turnover 0.046 0.061
(0.245) (0.143)
(0.907) (0.804)
(0.564) (0.545)
Asset Turnover 0.106 0.329
(0.731) (0.806)
(0.208) (0.021)
Log (Assets) 2.232*** 1.978***
(8.888) (3.703)
(0.307) (0.905)
(0.309) (0.577)
(1.006) (1.573)
(0.819) (0.530)
(1.295) (0.024)
(1.370) (0.878)
n 124 98
R2 0.885 0.813
**, *** Indicate two-tailed statistical significance at the 5 percent and 1 percent levels, respectively.
This table presents the results of an analysis that examines how supervisors increase the leniency of subjective adjustments when SOEs have unfavorable
EVA performance and favorable ROE performance. The results of this table are based on SOE firms that were evaluated by the SASAC after EVA
adoption (2010–2012). Column (1) presents the results for SOEs that have favorable ROE performance, and Column (2) presents the results for SOEs that
have unfavorable ROE performance. All continuous SOE-level independent measures are standardized by year such that they have a mean of 0 and
standard deviation of 1. To control for residual dependence in our pooled time-series cross-sectional regressions, we cluster standard errors at the SOE
level.

TABLE 5
Fairness Concerns
(1) (2)
EVA Adoption Year Post-EVA Adoption Year
Unfavorable EVA 1.191* 0.550
(1.835) (1.521)

(1.017) (0.270)
Unfavorable EVA 3 Favorable ROE 1.653** 0.155
(2.035) (0.355)
ROE 0.697*** 0.558**
(2.736) (2.298)
EVA 0.063 0.280**
(0.305) (2.032)
EBT 0.915*** 0.379***
(5.282) (4.294)
Inventory Turnover 0.086 0.050
(0.258) (0.248)

(0.285) (0.983)
(0.363) (0.996)
Asset Turnover 0.124 0.416*
(0.364) (1.824)
(0.239) (1.019)
Log (Assets) 2.102*** 1.902***
(4.626) (7.162)
(0.425) (0.356)
Misconduct 0.562** 0.143*
(2.463) (1.679)
(0.286) (0.038)
(1.436) (0.228)
(1.044) (0.028)
(0.801) (1.093)
n 74 148
R2 0.895 0.835
This table presents the results of an analysis that examines whether our findings are more pronounced when there is more uncertainty about how EVA
adoption affects the perceived fairness of performance evaluations. The results of this table are based on SOE firms that were evaluated by the SASAC
after EVA adoption (2010–2012). Column (1) presents the results for the EVA adoption year, and Column (2) presents the results for the post-EVA
adoption year period. All continuous SOE-level independent measures are standardized by year such that they have a mean of 0 and standard deviation of
1. To control for residual dependence in our pooled time-series cross-sectional regressions, we cluster standard errors at the SOE level.

To corroborate that our findings are indeed driven by supervisors’ personal preferences, we make a distinction between
politically connected SOEs headquartered in Beijing (Personal Preference SOEs) and other SOEs (Other SOEs).24 Du et al.
(2012) suggest that officials from Personal Preference SOEs differ from other SOE officials along two important dimensions.
First, their geographic proximity to the SASAC facilitates more frequent in-person interactions with SASAC officials. Second,
their extensive previous political careers not only make them more socially similar to SASAC officials, but also give them
higher social standing and more strategic allies and partners in critical political circles.
We expect this distinction to capture variation in the extent to which supervisors consider the fairness of their evaluations
because, in general, individuals are more likely to consider the fairness of their actions when they interact with those who are more
familiar and socially similar to them (Hafer and Olson 2003). Moreover, we expect this distinction to also capture variation in self-
serving behavior because politically connected SOE officials are more likely to challenge performance evaluation decisions due to
their higher social standing (Bol et al. 2010) and are better able to help SASAC officials advance their political careers (Du et al.
2012). Furthermore, we expect these self-serving effects to be amplified by frequent in-person interactions that make confrontations
more costly (Murphy and Cleveland 1991) and exchanges of favors more likely (Coleman 1994). Thus, if our findings are driven
by supervisors’ personal preferences, then we expect them to be more pronounced for Personal Preference SOEs.
To test this, we repeat our main analysis separately for Personal Preference SOEs and Other SOEs. The results of this
analysis are presented in Table 6. Consistent with our findings resulting from supervisors’ personal preferences, our findings are
more pronounced for Personal Preference SOEs. Specifically, the interaction between Unfavorable EVA 3 Favorable ROE is
positive and statistically significant (p , 5 percent, two-tailed) for politically connected SOEs headquartered in Beijing, but not
for other SOEs.25,26
Robustness Tests
Next, we perform one tabulated and several untabulated robustness tests to ensure that our findings are not driven by (1) any
single department within the SASAC; (2) how supervisors generally respond to conflicting outcomes between performance
measures; (3) a desire to make post-EVA performance scores consistent with pre-EVA performance scores; or (4) target ratcheting.
First, we run our main analysis by department. See Panel B of Table 1 for a breakdown of our sample by department. Because a
lack of degrees of freedom precludes us from including all control variables, our departmental analysis only includes control variables
that are statistically significant at p , 10 percent in our main analysis (Table 3). The results of this analysis are presented in Table 7.
The table shows that the coefficient on Unfavorable EVA 3 Favorable ROE is positive and statically significant (p , 1 percent, two-
tailed) for three out of four departments and, thus, that our findings are not driven by any single department within the SASAC.
Second, we repeat our main analysis after substituting the Favorable ROE indicator for indicators that capture favorable
performance on the other performance measures used in the performance score formula (EBT, Inventory Turnover, Receivables
Turnover, and Sales Growth). As in our main analysis, we classify performance as favorable (unfavorable) when performance
exceeds (falls short of) the lower of the following two values: (1) last year’s achieved performance; and (2) the average of the prior
three years’ achieved performance. We find that the interactions between these indicators and Unfavorable EVA are statistically
insignificant (p . 10 percent, two-tailed). Further, we also repeat our main analysis after recoding our Unfavorable EVA and
Favorable ROE indicator variables such that they capture, respectively, favorable EVA performance and unfavorable ROE
performance. We find that the interaction between these revised indicator variables is statistically insignificant (p . 10 percent,
two-tailed). Thus, it does not appear that supervisors always take advantage of conflicting outcomes between performance measures
to give more lenient evaluations.27
24
Following Du et al. (2012), we classify SOEs as politically connected when their CEO has held top positions in the central government.
25
The difference in the coefficient on the interaction term between Personal Preference SOEs and Other SOEs is statistically significant at p , 5 percent
(two-tailed).
26
We also tried to rule that our results are driven by optimal behavior that maximizes profits for the Chinese government (results not tabulated). In order
to accomplish this, we regress the economic determinants of EVA adoption identified by Garvey and Milbourn (2000) (business diversity, capital
intensity, leverage, and size) on our unfavorable EVA performance indicator. Inconsistent with this alternative explanation for our results, we find that
the coefficients on all economic determinants are statistically insignificant (p . 10 percent, two-tailed) and that the area under the Receiver Operating
Characteristic curve (AUC) indicates (AUC ’ 0.5) that our logistic regression model cannot adequately discriminate between favorable and
unfavorable EVA performance.
27
A statistically insignificant coefficient on Unfavorable EVA 3 Favorable ROE (i.e., a no-effect) in sample partitions may arise from a lack of statistical
power due to a limited sample size. To address this concern, we examine the frequency that EVA was unfavorable and ROE was favorable for each
sample partition. This frequency is as follows: 25 Pre-EVA Adoption versus 29 Post-EVA Adoption (Table 3); 13 EVA Adoption Year versus 16 Post-
EVA Adoption Year (Table 5); and 11 Personal Preference SOEs versus 18 Other SOEs (Table 6). These frequencies suggest that no-effects are not
driven by a lack of statistical power because the no-effect partitions either have a large absolute frequency (25 for the Pre-EVA Adoption partition in
Table 3) or a large relative frequency when compared to the corresponding partition that does find a statistically significant interaction effect.

TABLE 6
(1) (2)
Personal Preference SOEs Other SOEs
Unfavorable EVA 1.399*** 0.062
(3.157) (0.174)

(1.177) (1.656)
Unfavorable EVA 3 Favorable ROE 1.624** 0.316
(2.573) (0.680)
ROE 1.491** 0.526*
(2.480) (1.925)
EVA 0.051 0.581***
(0.442) (3.825)
EBT 0.338** 0.420***
(2.176) (4.156)
(1.703) (0.402)
0.495*
Receivables Turnover 0.045

(1.779) (0.272)
(0.240) (0.103)
Asset Turnover 2.669** 0.449
(2.709) (1.279)
(0.696) (0.692)
Log (Assets) 4.449*** 1.531***
(5.690) (4.871)
(1.483) (1.064)
Misconduct 1.190*** 0.034
(4.081) (0.341)
(0.657) (0.344)
Acquisition 0.253* 0.016
(1.730) (0.180)
(0.417) (0.082)
(0.960) (0.296)
n 64 158
R2 0.939 0.775
This table presents the results of an analysis that corroborates that our findings are indeed driven by supervisors’ personal preferences. The results of this
table are based on SOE firms that were evaluated by the SASAC after EVA adoption (2010–2012). Column (1) presents the results for politically
connected SOEs headquartered in Beijing (Personal Preference SOEs), and Column (2) presents the results for other SOEs (Other SOEs). All continuous
SOE-level independent measures are standardized by year such that they have a mean of 0 and standard deviation of 1. To control for residual dependence
in our pooled time-series cross-sectional regressions, we cluster standard errors at the SOE level.

TABLE 7
SASAC Departments
(1) (2) (3) (4)
General Office Section I Section II Section III
Coefficient Coefficient Coefficient Coefficient
Explanatory Variable (t-statistic) (t-statistic) (t-statistic) (t-statistic)
Unfavorable EVA 1.029 0.452 1.161* 0.194
(1.598) (1.032) (1.871) (0.246)
Favorable ROE 0.742 0.339 0.769 0.622

(0.918) (0.883) (1.397) (0.977)
Unfavorable EVA 3 Favorable ROE 1.889*** 0.549*** 1.295 1.376***
(3.179) (6.413) (1.521) (4.183)
ROE 1.032*** 0.070 0.635*** 0.259
(3.428) (0.233) (2.852) (0.119)
EVA 0.280*** 0.548*** 0.680*** 0.258
(2.925) (11.940) (4.291) (1.248)
EBT 0.166 0.335*** 0.494*** 0.262
(0.759) (3.049) (2.760) (1.297)
Asset Turnover 0.384 1.703*** 0.053 0.653
(0.331) (3.267) (0.115) (0.568)
Log (Assets) 2.282*** 1.420*** 2.189*** 1.563***

(7.651) (5.318) (14.322) (6.753)
Province Development Level 0.565 0.035 0.289** 0.018
(0.837) (0.516) (2.121) (0.174)
Industry Fixed Effects No No No No
n 30 61 63 68
R2 0.856 0.867 0.841 0.797
This table presents the results of an analysis that examines whether our findings are driven by any single department within the SASAC. The results of this
table are based on SOE firms that were evaluated by the SASAC after EVA adoption (2010–2012). Columns (1) through (4), respectively, present the
results for the General Office, Section I, Section II, and Section III. All continuous SOE-level independent measures are standardized by year such that
they have a mean of 0 and standard deviation of 1. To control for residual dependence in our pooled time-series cross-sectional regressions, we cluster
standard errors at the SOE level.
Third, we control for year-over-year changes in the unadjusted formula-based performance score and the one-year lagged
value of Subjective Adjustment to ensure that our results are not driven by attempts to make post-EVA adoption performance
evaluations consistent with pre-EVA adoption performance evaluations. Findings from Woods (2012) indicate that supervisors
may use their prior-period evaluations as a basis to assess whether current performance is appropriately represented.
Inconsistent with this explanation, we find that the coefficients on these additional control variables are not statistically
significant in any of our regression specifications and that our results remain qualitatively similar.
Finally, we control for the one-year, two-year, and three-year change in EVA to ensure that our results are not driven by
target ratcheting. Supervisors may give lenient performance evaluations because SOEs already significantly improved their
EVA performance (Indjejikian, Matějka, and Schloetzer 2014). Inconsistent with this alternative explanation, we find that our
results remain qualitatively similar after we add these additional control variables to our analyses.
VI. CONCLUSION
This study examines how substituting a new performance measure for an old performance measure affects the decision
process through which supervisors make subjective adjustments. Our findings, derived from the Chinese government’s
performance evaluations of State-Owned Enterprises, indicate that supervisors make more lenient subjective adjustments when
unfavorable performance on the new measure conflicts with favorable performance on the old measure. Supervisors appear to
accomplish this by shifting the weight in their subjective adjustment decisions from the unfavorable new performance measure
to the favorable old performance measure, rather than making a simple upward adjustment. Our results indicate that supervisors

behaved in this manner because concerns about the perceived fairness of the new evaluation procedure motivated them to
consider their personal preferences in subjective adjustment decisions.
Our study helps to explain why previous experience under a performance measurement scheme affects subsequent
evaluations (Frederickson et al. 1999; Ittner et al. 2003). Existing research posits that this occurs because the mental
representation individuals use to make decisions or judgments is inflexible to changes in task demands. Our findings show that
this also occurs because supervisors are less likely to penalize subordinates for performing poorly under the new performance
measurement scheme when they perform well under the old performance measurement scheme.
Furthermore, our study contributes to our understanding of how the use of subjectivity in evaluating employees affects the
leniency of performance evaluations. Existing research has identified various factors that predispose supervisors to giving
lenient performance evaluations. Our results suggest that these factors have a more pronounced impact on subjective
performance evaluations when the adoption of new performance measures creates concerns about the perceived fairness of
performance evaluations. Additionally, our results indicate that the extent to which these factors affect the leniency of
subjective performance evaluations is constrained by the available performance data.
This study has several limitations that could be addressed by future research. First, our findings could result from a
preference for fair evaluations and self-interest. We do not attempt to tease out the effects of these two motives on our findings
because it is inherently difficult to do so using archival data. Future experimental research can examine this issue. Second, we
infer the process through which supervisors make subjective adjustment decisions from regressing their subjective adjustments
on various factors because we are unable to directly measure our constructs (e.g., fairness concerns). More in-depth interviews,
combined with survey methods, could yield more direct and additional insights into the role that these constructs play.
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APPENDIX A
Variable Definitions
Variable Definition Source
Dependent Variable
Subjective Adjustment The percentage with which performance scores are subjectively adjusted. See SASAC
Appendixes C and D for an overview of the SASAC’s performance
measurement system and a detailed example.
Main Independent Variables
Unfavorable EVA Equals 1 when EVA falls short of our performance benchmark, and 0 otherwise. SASAC
Favorable ROE Equals 1 when ROE exceeds our performance benchmark, and 0 otherwise. WIND
Control Variables
ROE Net income scaled by average book value of equity. WIND
EVA Economic value added, calculated by SASAC. A detailed discussion of this SASAC
calculation is provided in Appendix B.
EBT Earnings before taxes and extraordinary items. WIND
Inventory Turnover Cost of goods sold divided by average inventory. WIND
Receivables Turnover Operating revenue divided by average accounts receivable. WIND
Sales Growth Sales scaled by the prior year’s sales. WIND
Asset Turnover Total sales divided by total assets. WIND
Leverage Total liabilities scaled by total assets. WIND
Log(Assets) Logarithmic transformation of total assets. WIND

Log(Employees) Logarithmic transformation of total employees. WIND
Misconduct Equals 1 when an SOE is accused in the focal year of financial misconduct, and Various
0 otherwise. Accusations of financial misconduct pertain to financial disclosure
that are made with the purpose to mislead capital markets, including
accounting manipulation, delayed disclosures, and misleading management
forecasts. We obtain these data from CSMAR for allegations of financial
misconduct relating to listed firms owned by SOEs and supplement these data
with various internet keyword searches.
Accident Equals 1 when an SOE has workplace accidents in the focal year, and 0 Various
otherwise. We use data from a government agency (State Administration of
Work Safety) as our main data source and supplement this data with various
internet keyword searches.
Acquisition Equals 1 when an SOE acquired another SOE in the focal year, and 0 otherwise. Internet Searches
National GDP Growth National GDP Growth as reported by the China Statistics Bureau. WIND
Province Development Level The provincial development index is the composite National Economic Research Fan et al. (2003)
Institute (NERI) index of credit market, government decentralization, and legal
environment developed by Fan, Wang, and Zhu (2003). The credit market
index measures the percentage of deposits taken by non-state financial
institutions and the percentage of short-term loans to the non-state sector for
each province. The government decentralization index is based on government
spending as a percentage of GDP, the tax rates in a province, and the amount
of government administrative regulations for each province in each year.
Higher index values suggest less government involvement. The legal
environment index is measured by the number of lawyers as a percentage of
the population, the efficiency of the local courts, and protection of property
rights for each province in each year.

APPENDIX B
Explanation of Economic Value Added (EVA) Calculation
EVA ¼ Net Operating Profit Adjusted Capital 3 Cost of Capital
Net Operating Profit Net Income þ 0.75 3 (Interest þ R&D Expense 0.53 Non-Recurrent Income)
Adjusted Capital Owners’ Equity þ Total Liabilities Interest-Free Current Liability Construction in Progress
(in defined core businesses)
Cost of Capital 5.5 percent in principle.
4.1 percent for SOEs in the following industries: military, research, electric power, and construction.
The cost of capital increases by 0.5 percent when manufacturing (non-manufacturing) firms have a
leverage ratio larger than 0.75 (0.80).
This EVA formula, including the cost of capital component, was in effect for the entire post-EVA period (2010–2012).
APPENDIX C
Overview of the SASAC’s Performance Evaluation System
1. Formula-Based Performance Score
Base Points for Achieved Range

Measures Points Performance Points

Points EVA 40 [8,8] [32,48]
Points EBT 30 [6,6] [24,36]
Points PM 1 15 [3,3] [12,18]
Points PM 2 15 [3,3] [12,18]
Total 100 [20,20] [80,120]
The benchmark that the SASAC uses in the performance score formula is generally based on the lower of the following
two values: (1) last year’s achieved performance; and (2) the average of the prior three years’ achieved performance. If targets
are set above this benchmark, then the SASAC adds one point for every 2 percent of positive variance and deducts one point for
every 3 percent of negative variance. However, if targets are set below this benchmark, then the SASAC adds one point for
every 3 percent of positive variance and subtracts one point for every 3 percent of negative variance. The points that are added
and subtracted are capped as indicated in the column labeled ‘‘Points for Achieved Performance.’’ Note that subjectivity plays
no role in the calculation of this score.
2. Subjective Adjustment
If the target performance level has been achieved, then increase points earned for a performance measure up to 15 percent
based on a subjective evaluation of achieved performance levels. For example, after making this subjective adjustment to the
formula-based score for EVA, the range of the points earned for EVA (Adjusted Points EVA) equals approximately [32; 55]
(minimum ¼ 32, and maximum ¼ 48 3 1.15).
Adjusted Performance Score ¼ Adjusted Points EVA þ Adjusted Points EBT þ Adjusted Points PM 1 þ Adjusted Points PM 2.
3. Subjective Performance Measures
Adjustment
Measures Range
Misconduct [2,0]
Accident [2,0]
Acquisition [0,2]
Final Score ¼ Adjusted Performance Score þ Score for Performance on Subjective Performance Measures.

4. Rank SOEs Based on their Final Score and Subjectively Determine Cutoffs for Overall Performance Ratings, which
Range from A (Highest) to E (Lowest)
The SASAC does not use a forced ranking system and, thus, there is no requirement that a set number or percentage of
SOEs must fall in each rating category. In our sample, the lowest rating is a D.
APPENDIX D
Illustrative Example
1. Formula-Based Performance Score
Last Avg. Actual

Measures Year 3 Years Target Results Score Explanation
EVA 3.50 3.20 3.60 þ14% Target (3.60) . SASAC’s Benchmark Target (3.20)
Points EVA ¼ 40 þ (14%/2%) ¼ 47
EBT 70.00 68.00 66.00 þ15% Target (66) , SASAC’s Benchmark Target (68.00)
Points EBT ¼ 30 þ (15%/3%) ¼ 35
Inventory Turnover 1.20 1.10 1.05 3% Target (1.05) , SASAC’s Benchmark Target (1.10)
Points PM 1 ¼ 15 (3%/3%) ¼ 14
Sales Growth 0.10 0.09 0.08 þ9% Target (0.08) , SASAC’s Benchmark Target (0.09)
Points PM 1 ¼ 15 þ (9%/3%) ¼ 18
2. Subjective Adjustment
Subjective Adjustment ¼ 12 percent.

Adjusted Performance Score ¼ 47 3 1.12 þ 35 3 1.12 þ 14 þ 18 3 1.12 ¼ 126.
3. Subjective Performance Measures
Misconduct Charged by National Audit Office for the manipulation of sales numbers: 0.5 penalty points
deducted.
Accident Two workplace accidents occurred, with one causing the death of multiple workers: 0.5
penalty points deducted.
Acquisition Acquired a financially distressed SOE: 1.5 bonus points added.
Final Score ¼ 126 0.5 0.5 þ 1.5 ¼ 126.5.


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THE ACCOUNTING REVIEW American Accounting Association

Vol. 93, No. 1 DOI: 10.2308/accr-51763

How Adopting New Performance Measures Affects

The Accounting Review

II. HYPOTHESIS DEVELOPMENT

Background on Subjective Adjustments

The Accounting Review

The Accounting Review

III. RESEARCH SETTING

Performance Evaluation System

The Accounting Review

Change in the Performance Measurement System

The Accounting Review

EVA Adoption Preparations

IV. SAMPLE SELECTION AND VARIABLE DEFINITION

The Accounting Review

The Accounting Review

The Accounting Review

Panel B: Distribution of Unique SOEs by SASAC Department and Industry (n ¼ 82)

The Accounting Review

Volume 93, Number 1, 2018

The Accounting Review

Volume 93, Number 1, 2018

Panel C: Correlation Coefficients—Pre- and Post-EVA Adoption

EVA 0.177 0.339***

The Accounting Review

The Accounting Review

Favorable ROE 0.413 0.247

Receivables Turnover 0.121

The Accounting Review

The Accounting Review

Favorable ROE 0.611 0.099

Receivables Turnover 0.077 0.104

The Accounting Review

The Accounting Review

Favorable ROE 0.509 0.478

Receivables Turnover 0.045

The Accounting Review

Favorable ROE 0.742 0.339 0.769 0.622

Log (Assets) 2.282*** 1.420*** 2.189*** 1.563***

The Accounting Review

The Accounting Review

The Accounting Review

The Accounting Review

Log(Assets) Logarithmic transformation of total assets. WIND

The Accounting Review

1. Formula-Based Performance Score

Base Points for Achieved Range

Measures Points Performance Points

3. Subjective Performance Measures

The Accounting Review

1. Formula-Based Performance Score

Last Avg. Actual

Subjective Adjustment ¼ 12 percent.

3. Subjective Performance Measures

Final Score ¼ 126 0.5 0.5 þ 1.5 ¼ 126.5.

The Accounting Review

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Log (Assets) 2.282* 1.420* 2.189* 1.563*