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

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  • Harley E. Ryan
  • Emery A. Trahan

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.

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  • Harley E. Ryan & Emery A. Trahan, 2007. "Corporate Financial Control Mechanisms and Firm Performance: The Case of Value‐Based Management Systems," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 111-138, January.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:1-2:p:111-138
    DOI: 10.1111/j.1468-5957.2006.00660.x
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    1. Rapp, Marc Steffen & Schellong, Daniel A. & Schmidt, Maximilian & Wolff, Michael, 2010. "Considering the shareholder perspective: value-based management systems and stock market performance," CEFS Working Paper Series 2010-09, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    2. Sebastian Firk & Torben Schmidt & Michael Wolff, 2019. "Exploring Value‐Based Management Sophistication: The Role of Potential Economic Benefits and Institutional Influence," Contemporary Accounting Research, John Wiley & Sons, vol. 36(1), pages 418-450, March.
    3. Williams, Michael A. & Baek, Grace & Park, Leslie Y. & Zhao, Wei, 2016. "Global evidence on the distribution of economic profit rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 356-363.
    4. Rapp, Marc Steffen, 2010. "Information asymmetries and the value-relevance of cash flow and accounting figures: empirical analysis and implications for managerial accounting," CEFS Working Paper Series 2010-08, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    5. Adel Elgharbawy & Magdy Abdel-Kader, 2013. "Enterprise governance and value-based management: a theoretical contingency framework," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 17(1), pages 99-129, February.
    6. Giulio Corazza, 2019. "Value Based Management Systems and Firm Performance: An Analysis of the Literature," MIC 2019: Managing Geostrategic Issues; Proceedings of the Joint International Conference, Opatija, Croatia, 29 May–1 June 2019,, University of Primorska Press.
    7. S. Dreving R. & L. Khrustova Y. & Светлана Древинг Робертовна & Любовь Хрустова Евгеньевна, 2016. "Современное понимание категории «внутренний финансовый контроль»: проблемы и перспективы изучения // Modern Understanding of Internal Financial Control: Problems and Perspectives of Investigation," Управленческие науки // Management Science, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 6(3), pages 30-44.
    8. Valentin Beck, 2014. "The effects of the implementation of value-based management," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 7(2), pages 153-165, September.
    9. Christian Brück & Jonas Ludwig & Anja Schwering, 2018. "The use of value-based management in family firms," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 28(4), pages 383-416, February.

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