Jan Bouwens

The consequences of customization on management accounting system design

The understanding of the antecedent conditions influencing the design of management accounting systems (MASs) is very limited. In recent years, significant research attention has been devoted to understanding how different strategic priorities influence these systems. However, the results of these studies have been, at best, equivocal and numerous calls have been made for further research to “unravel” the conflicts that have emerged in the literature. The purpose of this study is to examine not only the relation between strategy and MAS but also to develop a theoretical model to explain how and why this relation exists. The model draws on Galbraith [Galbraith, J. (1973). Designing complex organisations. Reading: Addison-Wesley] to develop a theoretical argument concerning the inter-relations among customization, interdependence and MAS. We are particularly interested in assessing whether the relation between customization and MAS is a direct one or whether the relation operates via interdependence. The results indicate that customization affects MAS via interdependence, rather than directly. The study of 170 production and sales managers further revealed little difference in MAS use between production and sales managers facing similar amounts of customization or interdependence.

Assessing the Performance of Business Unit Managers

Using a sample of 140 managers, we investigate the use of various performance metrics in determining the periodic assessment, bonus decisions, and career paths of business unit managers. We show that the weight on accounting return measures is associated with the authority of these managers, and we document that both disaggregated measures (expenses and revenues), and nonfinancial measures play a greater role as interdependencies between business units increase. The results suggest separate and distinct roles for different types of performance measures. Accounting return measures are used to create the proper incentives for managers with greater authority, while disaggregated and nonfinancial measures are employed in response to interdependencies.

The Interplay Between Forward-Looking Measures and Target Setting

We examine whether financial targets are based on both forward-looking and financial information, rather than on financial information only. We collect sales and performance appraisal data of store managers in a retail chain. The firm issues directives focused on the provision of excellent customer service and assesses store managers’ compliance with these directives subjectively. We demonstrate that, controlling for current sales, compliance with directives scores predicts future sales performance. We find that, next to objective sales information, this forward-looking information is impounded in the next year’s sales target. Finally, we find some evidence that suggests that incorporating forward-looking information improves the accuracy of sales targets.

Performance Measures and Intra-Firm Spillovers: Theory and Evidence

We revisit the question of how performance measures are used to evaluate business unit managers in response to intra-firm spillovers because prior studies have documented conflicting empirical evidence. Specifically, we are interested in variation in the relative incentive weightings of aggregated “above-level�? measures (e.g., firm-wide net income), “own-level�? business unit measures (e.g., business unit profit), and specific “below-level�? measures (e.g., R&D expenses) in response to spillover arising from either the focal manager’s effect on other business units’ performance or the other units’ effect on the focal manager’s performance. Our theory highlights existence of an interaction between the two directions of spillovers. In our empirical work, we account for the interaction effect. Based on a purpose-developed survey of 122 business unit managers, we report that the incentive weighting on above-level measures increases by approximately 50 percentage points when managers face both types of spillovers (as opposed to one type of spillover).

The Effect of Allocating Decision Rights on the Generation, Application, and Sharing of Soft Information

Should a bank take small to medium sized companies at face value? Research in both accounting and finance has tried to answer this question by studying the use of soft information that is qualitative, hard to verify, and costly to transfer. We study how the generation, application, and sharing of this soft information is affected by the location of knowledge and the allocation of decision rights. We exploit a quasi-natural experiment at a large European bank to study whether reallocating decision rights away from the loan officer enables or impedes the use of soft information in the operational decision making process. Our findings indicate that the reduction in decisions rights increases the amount of soft information integrated in the the credit application process. These findings are robust to controlling for strategic loan sorting behavior, manager fixed-effects, and the likelihood of acceptance. We also document that this increase in considered soft information is driven by a change in behavior of the incumbent loan officers and that this change in behavior improves the loan application process through better ex-post loan outcomes.Should a bank take small to medium sized companies at face value? Research in both accounting and finance has tried to answer this question by studying the use of soft information that is qualitative, hard to verify, and costly to transfer. We study how the generation, application, and sharing of this soft information is affected by the location of knowledge and the allocation of decision rights. We exploit a quasi-natural experiment at a large European bank to study whether reallocating decision rights away from the loan officer enables or impedes the use of soft information in the operational decision making process. Our findings indicate that the reduction in decisions rights increases the amount of soft information integrated in the credit application process. These findings are robust to controlling for strategic loan sorting behavior, manager fixed-effects, and the likelihood of acceptance. We also document that this increase in considered soft information is driven by a change in behavior of the incumbent loan officers and that this change in behavior improves the loan application process through better ex-post loan outcomes.

Understanding Investment Decisions: The Role of Cost Accounting

In 2008 Clayton Christensen, Stephen Kaufman and Willy Shih pointed the accusatory finger of wrong investment decisions to: ill documented cost information, incorrect application of financial decision making tools and short termism. Given that we have little literature systematically documenting costing information practices in the light of making investment decisions we can refute nor confirm most of these concerns. That is, do firms make their investment decisions often wrong or do they only do so in appearance? With this paper I try to make the case for how cost accounting research can enhance our understanding of how investment decisions are made in firms. I identify four dimensions that are understudied and that yet appear to be relevant in this regard: I. Cost structure information; II. Evaluation tools; III de-biasing methods, and IV. The organizational context in which investment decisions are made.

Understanding the Cost Structure of a Firm: Balancing Activities and Achieving Economies of Scope

This paper studies if it matters whether a firm’s products are produced jointly in one organizational unit or separately in multiple organizational units. We propose that spillovers between products (e.g., knowledge and information transfers) are more likely to occur when production takes place in one organizational unit. Our evidence confirms that when multiple products are produced in one organizational unit, such economies-of-scope effects materialize. We also find that the spillover effects start to dissipate when the activity levels for the products are unequal. For example, we find that the positive spillover of Product B with regard to the efficiency achieved in producing Product A is significantly reduced as the level of activities in producing Product A differs from the level of activities in producing Product B. Importantly, our findings are unrelated to the centralization or decentralization of decision rights, as the decision rights are identical across organizational units, independent of the number of products assigned to a unit. Our results are based on single firm study. In particular, we study a divisional setting of a transportation firm where, at each location, the firm either decides to offer two services (i.e., food and non-food transportation) or to offer only one service (i.e., either food or non-food transportation).

Principals and Their Car Dealers: What Do Targets Tell About Their Relation?

The paper tries to establish for a large European car dealership whether target ratcheting and target achievements are associated with the type of contract offered to the franchisee in the dealership. We find that the franchisor sets different targets within a common stair-step incentive scheme conditional on whether or not the car dealer (franchisee) acquire the cars they sell exclusively from the franchisor. We also find that compared to non-exclusive dealers, exclusive dealers work harder to achieve their targets and are less likely to mute their effort when their target achievement is relatively high. We argue that the evidence we present is consistent with the ideas put forward in relational-contracts theory.

The Effect of Management Control Elements on Coordination

This study examines how control elements of a firm affect managerial decision making. The firm operates a network of 59 profit centers. It uses a transfer-pricing system designed to deal with externalities individual profit centers can impose on other profit centers. Further, profit center managers are incentivized with own-level residual income measures. The use of the latter measure would lead managers to make decisions benefiting their performance irrespective of whether these decisions negatively affect other profit centers. However, the firm implemented a third system that would potentially lead managers to benefit other profit centers. The firm established regional clusters of profit centers that meet at least once every quarter. The creation of these clusters creates proximity as profit centers perform complementary activities, making it more beneficial for them to coordinate. Our findings suggest that self-centered choices by profit centers are mitigated as proximity within a cluster increases. Additionally, we find evidence that proximity is positively associated with coordination and overall performance.