Virtual Issue on Empirical Management Accounting Research

Margaret A. Abernethy
Department of Accounting
The University of Melbourne

Dennis Campbell
Harvard Business School
Harvard University

1. Introduction

Management accounting research typically studies how to direct and motivate people ‘to do the
right things’ through incentives, information, or both. Since its very first issues, JAR has drawn
our attention to the difficulty of doing so as Devine (1964) highlights in his critique of A
Behavioral Theory of the Firm.The empirical management accounting research published over
the past decade in the journal notably picks up on this theme with a substantial focus on the role
of management accounting and control systems in organizational contexts where tasks are
complex, ambiguous and difficult to measure.

We focus on a set of 13 empirical papers published in JAR over the past 10 years that points to
the idea that management accounting and control practices in complex contracting environments
are not easily understood solely through the lens of traditional agency theory. These papers tend
to draw on a variety of theoretical frameworks ranging from newer economic models of
organizational culture and relational contracts to related theories from sociology and psychology.
They collectively give us new and important insights into the roles of incentives, information, and
employee selection in shaping norms, decision-making, and performance in organizations.

2. Review of Selected Empirical Management Accounting Research Published in JAR During the
Past 10 Years

At least three empirical papers over the past decade explicitly explore management control
issues in settings where output is complex and difficult to measure.
Kachelmeier, Reichert and Williamson (2008) draw on both economics and psychology to
study the effects of incentives on output in the context of creativity, an objective that is important
for many firms but can be ambiguous and difficult to measure. Their well-designed experiment
draws our attention to the complexity of creating incentives that encourage both productivity and
creativity. Despite the possibility that firms can implement multidimensional performance
measurement systems (e.g. “balanced scorecards”) that include measures of both productivity
and creativity, their results indicate that people ‘tend to simplify multidimensional objectives by
prioritizing on one objective over others’ and that ‘adding creativity to multidimensional
performance measures can do more harm than good’. While not the direct focus of the paper,
their results point to the importance of other forms of management control, such as employee
selection, in contexts where creative or other output can be difficult to measure.
Campbell (2012) draws on economic theories of corporate culture to examine this latter issue
directly by studying the role of selection as a means of influencing difficult to measure
performance outcomes in the context of consumer lending. Traditional incentive solutions to
control in his setting are difficult because employees are required to use judgment in their current
lending decisions, but the outcomes of these decisions can occur far into the future and be
affected by a variety of external factors. The results provide empirical evidence for the idea that
“input” controls – namely, the selection of employees whose preferences are better aligned with
organizational objectives – can be efficient and effective in complex contracting environments
where output measurement is difficult or costly.
While Campbell (2012) relies at least partially on the theory that employee selection and
incentive contracts can be substitutes under some conditions and complements under
others, Abernethy, Dekker and Schulz (2015) study this issue directly. They use survey data
across firms to assess if there is a trade-off between employee selection and the use of incentive
contracts. They limit their main analysis to firms which are expected ex ante to operate in
complex contracting environments, namely those for which learning is a key organizational
objective. The results are intriguing in identifying conditions under which employee selection can
act as either a substitute or as a complement to incentive contracts.
Another set of papers draws our attention to the importance of more subtle forms of control.
These studies collectively suggest an important link between management control system design
and organization culture through the development and reinforcement of social norms.
Tayler and Bloomfield (2011) examine how personal and descriptive norms can function as
informal controls, and how these norms can be activated or muted by formal control systems.
They find in an experimental setting that by activating individuals’ self-interested norms, formal
controls can mute desired personal norms (e.g., altruism) of individuals as well as their tendency
to conform to the desired behaviors of others around them (i.e., the descriptive norms).
Importantly, their evidence suggests these effects are long lasting and persist even after controls
are changed. Their results demonstrate the potentially influential effect that formal controls can
have on norms and behavior within organizations.
Chen and Sandino (2012) draw our attention to the role of compensation in facilitating the
development of social norms among rank and file employees. They collect archival data from two
retail stores and draw on efficiency wage theories to study the mitigation of employee theft – a
problem that is hard to control and costly to firms. Their work goes beyond the traditional
honesty-inducing control mechanisms in the accounting literature to examine how paying
workers more than their counterparts in other organizations – so called “efficiency wages” – can
activate norms of reciprocity . The results are consistent with the idea that efficiency wages
facilitate norms of reciprocity whereby employees are less likely to steal and collude with each
other.
Maas and Van Rinsum (2013) use an experiment to show how the firm’s incentive system can
interact with its information policy to influence managers’ social preferences and their
misreporting behavior. They find that the design of an incentive contract can determine whether
managers’ social preferences will lead to more, or less, performance misreporting. They also
show that managers’ misreporting behavior can be mitigated by their tendency to be honest
(following personal norm) and their desire to appear honest in front of others. The openness of
the information policy also increases honesty. This paper is notable in documenting that incentive
contracts are not only useful in rewarding and motivating effort, but can also be used to shape
the norms in the organization.
Cardinaels and Yin (2015) draw our attention to how ‘tone at the top’ can influence social norms
within a firm. Using a two-stage experiment they demonstrate that it is not just the design of the
incentive contract that matters but the ‘soft’ information that flows from the choices a principal
makes about providing incentives in the first place. When the principal actively uses an incentive
contract rather than a fixed salary to reward employees, it conveys to a new agent that the
descriptive norm in the firm is self-interest. The agent responds to this soft information by
conforming to what they perceive are the descriptive norms of their peers. This has a negative
consequence as the agent is now more likely to engage in undesirable behavior (e.g.,
misreporting).
Another set of related papers focuses on the prevalence of implicit incentives in organizations –
that is incentives that do not reside in any explicit performance contract but depend on the
expected future relationships between employees, managers, and firms. These studies examine
different forms and consequences of implicit incentive contracts.
Hales and Williamson (2010) examine implicit incentive contracts in a multi-period experimental
setting. In their work, implicit incentives arise based on expectations about how the manager will
allocate post-production resources between owners and employees. Their findings indicate that
reputation concerns in this setting encourage higher firm productivity and employee payoffs, but
only under conditions in which manager pay is relatively insensitive to the owner's ex post
allocation. The findings are important in providing a potential explanation for why executive
compensation is relatively insensitive to owner returns.
Campbell (2008) explores implicit incentives by examining the role of nonfinancial performance
metrics in organizational promotion decisions. Promotions provide incentives when they reward
past performance with increased pay and rank in the organization. Promotions serve a matching
function when they sort employees into the jobs for which their skills and abilities are best suited.
The results show that non-financial performance measures facilitate this latter matching role by
providing important information about the capabilities and expected future performance of lower-
level employees. This use of nonfinancial measures for matching creates powerful multi-period
implicit incentives in his research setting: employees subject to the strongest promotion
incentives exert more effort and, more intriguingly, more learning on nonfinancial dimensions of
performance.
Grabner and Moers (2013) explore the incentive versus sorting role of performance measures
even more directly. Using unique panel data from a retail bank, they show that as the difference
between the current task environment and that at the next level of promotion increases,
promotion decisions of superiors become less sensitive to objective measures of performance in
the current job and more sensitive to subjective assessments of individual ability. In using novel
data and clever empirical design to directly measure these dynamic shifts in the weighting of
different types of metrics, their work provides important new insights on how performance
measures are chosen and incorporated in promotion-based implicit incentive contracts.
While the above papers focus largely on various types of formal and
informal incentive mechanisms, a more recent stream of empirical research uses novel field-
experiments to examine important questions on the potential impact of information on decision-
making, productivity, and performance.
Li and Sandino (2018) conduct a field experiment at a retail organization in which they were
able to exogenously increase access to information about the creative work of peers through a
randomized implementation of a new information sharing system. While they find no average
effect of this system on the quality of creative work, job engagement, or financial performance,
they do find important heterogeneous treatment effects. Positive effects of information access
materialize only under three conditions in their study: (1) when users engage more actively with
the system, (2) when users have greater potential to learn from new information given their lack
of creativity, lack of exposure to others’ creative work (due to distance from other business units),
or both; and (3) their need to customize their creative work to divergent local market conditions.
Going beyond the dichotomy of access versus no access to information, Casas-Arce, Lorenco,
and Martinez-Jerez (2017) conduct a field-experiment in which they exogenously vary both the
frequency and level of detail of feedback on customer satisfaction and other nonfinancial
performance measures. Their results are important and surprising in showing that more detailed
and frequent feedback does not necessarily lead to better performance. In their field-setting,
better performance is achieved when feedback is detailed but infrequent. Their results are
consistent with a dynamic by which previous information is disregarded as new information
becomes available. This information “salience” effect has potentially important theoretical
implications for the optimal frequency of performance feedback.
Eyring and Narayanan (2018) explore information effects in the context of peer comparison.
Using the novel setting of online education, they conduct a field-experiment to measure the
performance effects of setting high reference points (top quartile versus median). Their empirical
analysis yields a performance effect that is concave in initial performance, with the effect being
negative for students below the median and positive for those between the median and top
quartile. Their results point to reference points as a critical design choice in information display
for purposes of peer comparison.
Overall, these 13 papers collectively address the challenges of designing management
accounting and control systems when firms face complex contracting environments. A key theme
is that economic frameworks provide useful insights to study how informal controls and the
design of the internal information environment can influence behavior, build desired social norms
and perhaps even shape organizational culture. These frameworks recognize the importance of
integrating social psychology into traditional economic models in order to solve complex control
problems. This set of empirical papers also points to the opportunities of using unique databases
and well-designed experiments to study accounting and control systems in practice, and they
demonstrate the symbiotic relation that has developed between experimental and field-based
research. We believe there remains great scope for management accounting researchers to get
into the field and document empirically the nature, causes, and consequences of these often
complex systems. Research in this area should also continue to be informed by theoretically
grounded and well implemented experimental studies. We are optimistic that JAR has been, and
seems poised to remain, at the forefront of publishing high quality research in this area.
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