IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v40y2005i04p721-745_00.html
   My bibliography  Save this article

Long-Run Investment Decisions, Operating Performance, and Shareholder Value Creation of Firms Adopting Compensation Plans Based on Economic Profits

Author

Listed:
  • Hogan, Chris E.
  • Lewis, Craig M.

Abstract

For firms that adopted economic profit plans between 1983 and 1996, we document changes in investment behavior that lead to improvements in operating performance and growth opportunities relative to these firms' past performance. The improvements, however, are similar to those realized by a set of non-adopting control firms that are selected on the basis of a logistic regression model of adoption choice. We then consider the possibility that some firms are better candidates for economic profit plans than others and classify adopters according to whether they make anticipated or surprising choices based on the adoption choice model. We find that anticipated adopters make changes in investment behavior that reduce invested capital and allow them to become more profitable than a sample of control firms that were expected to adopt but chose to continue using a traditional plan. A similar analysis of surprise adopters does not reveal significant performance differences relative to a sample of anticipated non-adopters. The classification analysis suggests that economic profit plans work best for firms that are expected to adopt such plans based on pre-adoption operating, organizational, financial, and compensation characteristics.

Suggested Citation

  • Hogan, Chris E. & Lewis, Craig M., 2005. "Long-Run Investment Decisions, Operating Performance, and Shareholder Value Creation of Firms Adopting Compensation Plans Based on Economic Profits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(4), pages 721-745, December.
    • Handle: RePEc:cup:jfinqa:v:40:y:2005:i:04:p:721-745_00
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109000001952/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    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. Shu Feng & Chun-Yu Ho, 2016. "The real option approach to adoption or discontinuation of a management accounting innovation: the case of activity-based costing," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 835-856, October.
    3. 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.
    4. Sudhakar V. Balachandran, 2006. "How Does Residual Income Affect Investment? The Role of Prior Performance Measures," Management Science, INFORMS, vol. 52(3), pages 383-394, March.
    5. Andrey B. Ankudinov & Bela S. Bataeva, 2021. "Capital structure and market capitalization: Empirical analysis of Russian public companies," Upravlenets, Ural State University of Economics, vol. 12(2), pages 35-42, April.
    6. Dyna Seng & Chaiporn Vithessonthi, 2017. "Environmental Efforts and Firm Performance," PIER Discussion Papers 64, Puey Ungphakorn Institute for Economic Research.
    7. Ahmed Magdy Fayed & Suchi Dubey, 2016. "An Empirical Study of Impact of EVA Momentum on the Shareholders Value Creation as Compared to Traditional Financial Performance Measures ¨C With Special Reference to the UAE," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(5), pages 23-38, May.
    8. Bialowolski, Piotr & Weziak-Bialowolska, Dorota, 2014. "External factors affecting investment decisions of companies," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-21.
    9. Heather Rhodes & James A. Ligon, 2019. "Regulatory Corporate Governance and the Valuation of IPO Firms," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 8(2), pages 18-56, April.
    10. 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.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:40:y:2005:i:04:p:721-745_00. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.