Corporate Financial Control Mechanisms and Firm Performance: The Case of Value-Based Management Systems

doi:10.1111/j.1468-5957.2006.00660.x

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Wiley InterScience

Journal of Business Finance & Accounting

Volume 34 Issue 1-2, Pages 111 - 138

Published Online: 20 Dec 2006

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Corporate Financial Control Mechanisms and Firm Performance: The Case of Value-Based Management Systems

Harley E. Ryan , Jr . ¹ Emery A. Trahan ¹*

¹ The authors are respectively from Robinson College of Business, Georgia State University and the College of Business Administration, Northeastern University, USA.

* Address for correspondence: Emery A. Trahan, Northeastern University, College of Business Administration, Finance Group, 413 Hayden Hall, Boston, MA 02115, USA.
e-mail: e.trahan@neu.edu

They appreciate helpful comments from Olubunmi Faleye, Sherry Jarrell, Shane Johnson, Jayant Kale, Omesh Kini, John Martin, Sheila Ryan, James Wallace, Sam Weaver, J. Fred Weston, Roy Wiggins, the Editor (Pete Pope) and an anonymous referee. They acknowledge the excellent research assistance of Pingshun Huang, Huihua Li, Roy Song and Lingling Wang. The authors are responsible for any remaining errors.

KEYWORDS

value-based management • residual income • management compensation • corporate governance

ABSTRACT

Abstract: We examine the performance of 84 firms that adopt value-based management (VBM) systems during the period 1984-1997. The typical firm significantly improves matched-firm-adjusted residual income after adopting VBM. This improvement persists for the five post-adoption years studied. After controlling for possible sample bias, we find that large firms show less improvement than small firms. We find a negative relation between tying compensation to VBM and post-adoption performance. We also find that firms reduce capital expenditures following VBM adoption, but that the reductions in spending do not differ based on the firms' growth opportunities. Overall, the evidence suggests that VBM improves economic performance and the efficient use of capital.

(Paper received August 2005, revised version accepted August 2006)

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1468-5957.2006.00660.x About DOI