Accounting-based Performance Measures Research Articles

Do Traditional Accounting-based Performance Measures explain the Stock Returns better than EVA®?-Evidence from India

Do Traditional Accounting-based Performance Measures explain the Stock Returns better than EVA®?-Evidence from India

Women representation on boards: a South African perspective

Purpose By looking at both theoretical and empirical findings, this study aims to investigate whether gender diversity results in improved corporate governance and financial performance for companies. Design/methodology/approach An analysis of the board composition of the Johannesburg Securities Exchange Top 40 companies as at 30 June 2013 and a comparison of the financial performance of the company were conducted. Findings Female directors were found to make up, on average, 18.78 per cent of the board of directors, with the majority of these women being in non-executive positions. Women representation appears to influence company performance positively when using accounting-based measures of performance (such as return on assets and return on equity), but negatively when using market-based measures (such as Tobin’s Q). The critical mass concept is also assessed and is found to have a positive effect. Originality/value These findings are of relevance to the boards of directors adhering to corporate governance requirements by challenging the role of women on the board of directors, as well as that of investors and those in practice, to understand the current status of women representation.

Managerial Performance Evaluation and Real Options

ABSTRACTIn a dynamic setting with demand following a random process, we ask how investment and operating decisions can be delegated to a manager with unknown time preferences. Only the manager observes the demand realization in each period and, therefore, has private information when choosing whether to acquire the productive asset and, subsequently, how to utilize it. We derive accrual accounting-based performance measures under which the manager will make the efficient decisions provided the investment date is exogenously given. We show that in an environment where demand follows a martingale process, the corresponding accounting rules are more decelerated if the firm has the option to idle capacity in case of negative demand shocks. We then describe the limitations of accounting-based performance measures in a scenario where the investment date is endogenously determined, i.e., the firm has an option to wait.

Leverage, Ownership Structure and Firm Performance: Evidence from Karachi Stock Exchange

This study aims to investigate the relationship between the ownership structure and firm performance. The study uses two performance measures i.e. market-based performance measure (Tobin’s Q) and accounting-based performance measure (return on assets (ROA)) as dependent variables and ownership proxies and other control variables as independent variables whereas leverage is used as moderating variable. The ownership proxies include the managerial ownership and institutional ownership while the control variables include the size of the firm, the coefficient of variation, and growth. This study has used simple regression analysis while using data of 355 firms listed on Karachi Stock Exchange (KSE) for the years 2003 to 2008. The results show that the ownership structure has significant relationship with the market-based performance measure, while it has insignificant relationship with the accounting-based performance measure. Moreover, the leverage has no moderating effect on the relationship between ownership structure and firm performance

Property rights institutions and bank performance across countries

Purpose – The purpose of this paper is to investigate the relationship between the quality of property rights institutions (PRIs) and bank financial performance in an empirical study of 136 countries over the period 1999-2006. Design/methodology/approach – The quality of PRIs and financial accounting-based measures of bank performance are obtained from the Economic Freedom of the World Project (Gwartney et al., 2006), the Polity IV Project, the World Bank data indicators database, and the International Monetary Fund. Several multiple regression analyses are conducted to test the study hypotheses. Findings – The results reveal that the quality of legal structure and security of PRIs positively (negatively) affects both bank cost efficiency (inefficiency) and profitability. The presence of a quality political structure negatively (positively) affects bank cost efficiency (inefficiency). The quality of political structure has no direct impact on bank profitability. The impact of PRIs on bank cost efficiency is more evident in the upper middle and high income group of countries than in the low and lower middle income group of countries. An appropriate level of PRI quality is essential to achieve both competition and development. Practical implications – The paper highlights policy implications for international policy makers, regulators, and the management of banks who are interested in banking sector development across countries. Originality/value – The study investigates the fundamental importance of PRI quality in its effect on the banking sector and extends the largely US-focused literature to a broader international setting.

The Influence of Inventory Leanness on Stock Performance: New Evidence from Equity Offerings

Throughout the last decade, many empirical studies have investigated the relationship between inventory management and accounting-based performance measures. However, empirical evidence that lean i...

Does EVA beat earnings? A literature review of the evidence since Biddle et al. (1997)

Biddle et al. (1997) demonstrated that sophisticated residual income-based figures are not as superior to traditional accounting-based performance measures in tracking shareholder value as consulting firms have claimed. During these 17 years, the intensive discussion of which type of measure tracks shareholder value creation the best continued, both from a theoretical and a practical perspective. This article compares the new findings from advanced research between 1997 and 2014 to assess the ongoing validity of Biddle et al.’s (1997) conclusions. We separate articles into two groups: the ones that find accounting-based performance measure to perform best, and the ones who speak in favor of residual income-based performance measures. In order to do this, we have scanned 618 articles that relate to the findings of Biddle et al. (1997) and analyze the 21 articles that actually contributed new evidence. We find that the conceptual discussion still favors management control systems based on the more sophisticated residual income-based measures. Yet empirically, the vast majority of new studies with advanced research designs still find that accounting numbers are by no means inferior in measuring shareholder value creation.

Management control in modern organizations

This paper deals with management control as an important instrument for managing performances in modern organizations. The paper indicates to the circumstances in which classical theory of management control was created, and describes its process of functioning, with the specifics in large organizations. The aim is to point to some open questions and directions of further development of the management control, as well as to at least partially fill the gap that exists in the domestic literature. The conclusion is that the existing management control framework remains still valid. Open questions can be best resolved within the concept that observes this matter as a 'package' of different control systems, not just those that are oriented to accounting-based performance measures.

Career concerns and accounting performance measures in nonprofit organizations

Many in the nonprofit sector view accounting-based performance measures to be overly influential and counterproductive in the evaluation of charities and their leaders. The contention is that such measures are imperfect and often biased, leading to dysfunctional rationing of fundraising and administrative infrastructure. To examine these concerns and the broader question of nonprofit executive incentives, we develop a model of nonprofit executives who are concerned with influencing external perceptions. In doing so, we demonstrate that accounting-based performance measures alter executive incentives in critical ways. In particular, disclosure of the functional classification of nonprofits’ expenses can reduce incentives to overinvest in fundraising and restore investments in programs; at the same time, it also comes with the potential downside of undermining key investments in long-term infrastructure.

Pay-performance sensitivity before and after SOX

The purpose of this paper is to investigate the impact on pay-performance sensitivity of the Sarbanes–Oxley Act (SOX), an effect that has been examined in prior research but with often conflicting findings. Using a more comprehensive sample of executives and of compensation components than in prior research, we compare managers’ pay-performance sensitivity before and after 2001–2002, a period during which regulatory changes were initiated to increase scrutiny over managerial manipulation and improve financial reporting quality. Based on ExecuComp data from 1992 to 2005 (and excluding the years 2001 and 2002), our results show that pay-performance sensitivity using either market-based or accounting-based measures of performance increased significantly following these events. When we further decompose executive pay into its cash-based and equity-based components, we find evidence of an increase in the link between performance and executive compensation for five of six measures for each performance metric. Thus, in contrast to most prior studies on the impact of SOX on executive incentives and compensation, our evidence is consistent with an improvement rather than weakening in the alignment of managerial and shareholder interests.

IFRS and the Use of Accounting-Based Performance Measures in Executive Pay

We examine the effect of IFRS (International Financial Reporting Standards) on the type of performance measures firms use to evaluate and reward their managers. We show that post-IFRS firms decrease the weight of Earnings-per-Share (EPS)-based performance measures in CEO pay contracts. We argue that IFRS add “noise” to accounting numbers which, based on optimal contracting theory, makes reported earnings less useful for evaluating managerial performance. Our findings suggest that while under IFRS accounting earnings could be more informative for valuation purposes, this might be achieved at the expense of other purposes that accounting serves, i.e., stewardship/performance contracting.

Cost efficiency of the Chinese banking sector: A comparison of stochastic frontier analysis and data envelopment analysis

This paper investigates the consistency of efficiency scores obtained from the stochastic frontier analysis and data envelopment analysis methods. We estimate cost efficiency and economies of scale based on an unbalanced panel data set of Chinese banks over the period 1994 to 2007. The results suggest moderate consistency between parametric and non-parametric frontier methods in efficiency scores rankings, identification of best and worst practise banks, the stability of efficiency scores over time and correlation between frontier efficiency and accounting based performance measures. Based on the findings, we conclude that the use of multiple frontier techniques for efficiency analysis is to be strongly recommended and that this methodological cross-checking analysis will result in more robust and convincing assessments of bank performance.

The influence of ownership structure on performance of Ghanaian insurance and banking firms

As at 2005, Ghana diversified 351 state-owned enterprises (either fully or partially owned), which attracted a substantial foreign direct investment into the country. This was to introduce efficiency into the management of these public enterprises, hence, the belief that ownership and, in particular, specific type of composition of corporate ownership structure has an impact on a firm's performance. This paper examines the influence of ownership structure on firm performance in Ghana as one of the buoyant and emerging economies in Sub-Saharan Africa. Using data from a period of2000-2010, panel regression was employed to analyze the impact of three major types of ownership structure and the determinants of performance. The ownership structures that are employed in this study are: (1) foreign ownership, (2) Government ownership, and (3) Close corporations. Using two accounting-based measures of financial performance (i.e. return on equity (ROE) and return on asset (ROA), and based on the sample of banks and insurance firms the result showed that both closed corporations and government-owned firms did not perform better than the foreign owned firms. The study also found that inflation and exchange rate are the two main macroeconomic variables that influence firm performance.

CEO compensation and timing of Executive Stock Option exercises

This study examines the relationship between Executive Stock Option (ESO) exercise and firm performance in Malaysia for the period 2002-2008. We found a significant positive relationship between ESO exercise and firm performance for both market and accounting-based performance measures using data on ESO exercising from 201 non-financial companies. Our panel data analysis of fixed effect estimation indicated that Malaysian executives are most likely to exercise their options immediately after they are granted; suggesting intended behaviour of adopting ESOs rather than maximising the shareholders' wealth as governance mechanism. This early exercise pattern of Malaysian executives also indicates that executives are averse to the risk.

Pay-Performance Sensitivity Before and after SOX

The purpose of this paper is to investigate the impact on pay-performance sensitivity of the Sarbanes-Oxley Act. We compare managers’ pay-performance sensitivity before and after 2001-2002, a period during which regulatory changes were initiated to increase scrutiny over managerial manipulation and improve financial reporting quality. Based on ExecuComp data from 1992 to 2005 (and excluding the years 2001 and 2002), our results show that pay-performance sensitivity using either market-based or accounting-based measures of performance increased significantly following these events. When we further decompose executive pay into its cash-based and equity-based components, we find evidence of an increase in the link between performance and executive compensation for five of six measures for each performance metric. The evidence presented here is consistent with an improvement in the perceived credibility of reported earnings and an increased reliance on earnings in compensation contracts, which in turn resulted in an increase in the link between executive compensation and shareholder wealth.

IFRS and the Use of Accounting-Based Performance Measures in Executive Pay

We examine the effect of IFRS on the use of accounting-based performance measures for evaluating and rewarding managers. We show that post-IFRS firms decrease the weight of Earnings-per-Share (EPS) based performance measures in CEO pay contracts. We provide indications that IFRS add “noise” to accounting numbers which, based on optimal contracting theory, makes reported earnings less useful for evaluating managerial performance. We argue that this is mainly due to the adoption of “fair value” accounting (FVA), which potentially makes accounting numbers more value-relevant, but also more volatile and sensitive to market movements. This study suggests that, whilst under IFRS accounting earnings could be more useful for stock market valuation purposes, this is achieved at the expense of other purposes that accounting serves, i.e., stewardship/performance contracting. Our findings suggest that when accounting numbers are designed to conform more closely to market values, they become less able to provide information over what is complementary to market values for evaluating managerial performance.

The Association between Executive Compensation and Firm Performance: An Artificial Neural Network Model

This paper investigates the association between executive incentive plans and firm performance by using an artificial neural network. Our results show that, we can accurately associate the executives' incentive plan with the firm's performance more than 70% of the time for the firms with the best and the worst performance. Our findings also suggest that (1) the importance of the components of the incentive plan changes from salary to bonus, stock awards and stock options over time, (2) accounting-based performance measure is associated with EPS while market-based performance measure is associated with the market-to-book ratio, and (3) when firms have higher uncertainty, they rely less on stock/option incentives. Finally, the simplicity of the model can help a firm better design or change the compensation scheme of the executives in order to perform better.

Ownership Structure, Firm Performance and CEO Turnover: The Case of Switzerland

This study examines the impact of company performance and ownership on CEO turnover and tenure in Swiss companies. Both market-based and accounting-based measures of performance are found to increase the likelihood of forced CEO departure yet to be unrelated to CEO tenure. Swiss CEOs are dismissed for poor performance albeit only when they have no ties to family shareholders. CEOs who are founders or members of the founding family have tenures which are, on average, 4.5 years longer than those of non-family CEOs. Both the size of shareholdings as well as the type of shareholders is found to be decisive for CEO changes: There is some evidence that large institutional shareholders increase the likelihood of CEO dismissal. In addition, institutions and family shareholders are found to shorten CEO tenure provided that the CEO is not a member of the founding family.

Which Pay for What Performance? Evidence from Executive Compensation in Germany and the United States

This paper analyzes executive compensation in German and U.S. corporations for the period 2005-2009 including the financial crisis. We analyze the impact of stock market performance and accounting-based measures of firm performance on different compensation components. We find that only firm earnings explain total executive compensation in both samples while stock market performance does not. Cash bonus payments of German executives are explained by firm earnings and not by stock returns while U.S. bonuses are also determined by stock returns. Moreover, the sensitivity of cash bonuses to firm performance depends on firm risk and firm size. We also provide evidence that firms choose performance measures with low volatility. Finally, we find that pay-performance sensitivities are higher in the U.S. than in Germany, but have no robust explanation how long-term compensation such as company stock and options is granted in either country.

An examination of executive compensation in the restaurant industry

The purpose of this empirical study is to examine executive compensation in the restaurant industry. The effects of a set of accounting-based performance measures, market-based performance measures, and executive-related factors on the compensations of firm CEOs, other senior executive managers, and board members were examined. Drawn from 16 consecutive years of data and a sample of over 2200 observations from restaurant companies, the findings revealed that determinants of equity based compensation vary by different types of executives. In addition, this study supports the notion that executive compensation in the restaurant industry is determined not only by firm performance measures but also by executive-related characteristics such as tenure.