The Effect of Financial and Non-Financial Performance Measures on Managerial Data Manipulation and Myopia: Analysis of a Causal Path Model

Abstract

This study investigates the effect of the use of performance measures on subordinate managers’ short-term behavior. In particular, we examine the relationship between the use of financial (lagging) and non-financial (leading) performance measures and two forms of short-term managerial behavior: data manipulation and myopia. We expect that these forms of short-term behavior can be partially explained by the perceived subjectivity of these measures and by the extent to which they allow budgetary slack. We derive a causal path model that we test through a survey of 112 financial managers. In line with prior research we find that financial measures increase data manipulation and myopia. Non-financial measures, instead, reduce myopia, but have no direct effect on data manipulation. We further find that the relationship between these measures and managerial behavior is partially mediated by perceived subjectivity and perceived slack. These findings add to our understanding of the consequences of performance evaluation systems on short-term managerial behavior as well as the trade-offs that firms face in the design of their performance evaluation system.