Gordon and Smith

8/13/2019 Gordon and Smith

1/17

Accounting Organizations andsociety, Vol. 17, No. 8, pp. 741-757,1992. 0361-3682/ 92 5.00+.00Printed in Great Britain 0 1992 Pergamon Press Ltd

POSTAUDITING CAPITAL EXPENDITURES AND FIRM PERFORMANCE: THEROLE OF ASYMMETRIC INFORMATION*

LAWRENCE A. GORDONU n i v er si t y of M a r yl a n d

and

KIMBERLY J. SMITHCollege of W i l l i a m a n d M a r y

Abstract

lhe design of a firms management control system and its relationship with firm performance are importantissues faced by todays managers. This paper hypothesizes that the relationship between firm performanceand control (postauditing) of capital investments is dependent on the following ftrm related variables:asymmetric information, capital mtensig, level of capital expenditures, and insider ownership. Among thearguments advanced and empirically confamed are that (1) firm performance is a function of the appropriatematch between postaudit sophistication and these fmn related variables, and (2) the performance of firmswhose postauditing procedures are not sophisticated enough is generally lower than that of firms whosepostauditing procedures are too sophisticated.

The normative argument linking the use of

sophisticated capital budgeting (SCB) selectiontechniques (i.e. the use of risk-adjusted,discounted cash flow analysis) to increasedfirm performance is well established (e.g.Rubenstein, 1973; Fama, 1977; Myers &Turnbull, 1977). The fact that large firms usethese SCB techniques in selecting capital assetsis equally well established (e.g. Klammer, 1972;Schall e t a l . , 1978; Rosenblatt & Jucker,1979; Scapens & Sale, 1981, 1985). However,empirical studies attempting to show a relation-

ship between the use of SCB selectiontechniques and firm performance have pro-duced mixed findings (e.g. Christy, 1966; Hakaet a l . , 1985; Kim, 1982; Klammer, 1973; Pike,1984, 1988). Nevertheless, evidence does existthat these techniques are beneficial in highly

certain environments (e.g. Schall & Sundem,

1980), under highly decentralized conditions(e.g, Haka, 1987) at lower or middle levels ofmanagement (e.g. Gordon, 1989), and underconditions of severe economic stress (e.g. Hakaet a l . , 1985). Hence, the relationship betweeninvestment selection sophistication and per-formance seems to be dependent on severalfactors.

In contrast to the extensive literature on theselection phase, relatively little has been writtenabout the postaudit (control) phase of capital

budgeting (i.e. postauditing procedures relatedto capital expenditures). From what has beenwritten, however, there seems to be a consensusthat postauditing should be a part of the capitalbudgeting process (e.g. Emmanuel & Otley,1985; Gordon & Pinches, 1984; Ring, 1975). As

The authors would like to thank H. Bao, J, Boschen, M. LeClere, K Leung, M. Myers, S. Park, G. Pinches, L. Pulley, A.Schick, K Silvester, J. Strong and two anonymous reviewers for their comments on earlier drafts of this paper. Supportfrom both the University of Maryland and the College of William and Mary is acknowledged.

741


2/17

742 L. A. GORDON and K J. SMITH

Gordon & Pinches (1984, p. 85) note, . .onceprojects are chosen, the control phase needs tobe set in motion. Further, empirical evidencesuggests that a large percentage of firms

(especially U.S. firms) do conduct some sort ofpostauditing (Corr, 1983; Gordon & Myers,1991; Scapens & Sale, 1981, 1985). Myers et a l .( 1991) find that, among those lirms using SCBtechniques for the selection of capital projects,the i n i t i a t i o n of sophisticated postauditingprocedures has a positive and significant effecton firm performance (defined by a change inTobins 4). Anecdotal evidence supportingthe positive effect of postauditing on firmperformance also exists (e.g. Gulliver, 1987).

However, Howell et a l . (1987) and Gordon &Myers ( 1991) show that many firms do a limitedamount ofpostauditing and/or handle postauditsin a rather naive fashion. Hence, the level ofsophistication of the postauditing system is animportant issue. In addition, it would appear thatthe economic benefits from a particular set ofpostauditing procedures exceed the costs insome cases, but not in others (Chu &Hertenstein, 1986). For example, Chenhall& Morris (1989) find that, for firms operating

in a relatively certain environment, the post-auditing of capital expenditures and the per-formance of senior managers (measured usinga self-rating instrument) are significantlycorrelated.

The purpose of the study reported in thispaper is to empirically examine the relation-ship between the level of postauditing sophisti-cation and firm performance. Hence, this studycan be viewed as extending earlier work (e.g.Myers et a l . , 1991) relating firm performanceto a postauditing system. As in Myers e t a l .( 1991) this study only examines firms whichuse sophisticated methods of investment selec-tion, since the two processes are not indepen-dent (Scapens 8~ Sale, 1985). It will be arguedthat one critical factor affecting the relationshipbetween firm performance and the level ofpostauditing sophistication is the degreeof asymmetric information between centralmanagement and lower level managers. Other

important variables considered in this studyinclude capital intensity, the level of capitalexpenditures, and insider ownership.

Two key findings emerge from the work

presented herein. First, firm performance isfound to be statistically associated with anappropriate m a t c h between the level of post-auditing sophistication and the firm relatedvariables noted above. Second, the performanceof firms for which the postauditing system isnot sophisticated enough is generally lowerthan that of firms for which the system is toosophisticated.

The remainder of this paper will proceed asfollows. The conceptual arguments underlying

the study are discussed in the next section ofthe paper. The third section of the paperdiscusses an empirical study designed to testthese arguments. The results of the empiricalstudy are discussed in the fourth section ofthe paper. The fifth and concluding sectionof the paper comments on the implications ofthe study results and directions for futureresearch.

CONCEPTUAL DISCUSSION

It seems reasonable to assume that, amongfirms choosing to have a postaudit system, theappropriate level of sophistication of the systemwill be determined by comparing the netbenefits of different types of systems. Onecritical factor hypothesized to be related to thesophistication of postauditing (SPA) relates toasymmetric information (AI). That is, lowerlevel managers in most organizations, who areoften responsible for approving all but thelargest capital expenditures, have access toinformation not readily available to centralmanagement (i.e. senior managers). Givendivergence of preferences, this asymmetrycreates an environment which allows opport-unistic behavior on the part of lower levelmanagers. Sophisticated postauditing, whichreduces the AI between central and lower levelmanagement, can provide at least a partial


3/17

POSTAUDITING AND

solution to the agency related problems arisingfrom AI.

There are at least three reasons whysophisticated postauditing can help alleviate the

agency problems arising from AI. First, throughsophisticated postauditing, central managementcan observe outcomes in a fashion morecomparable to those observed by lower levelmanagers. Hence, as noted by Gordon e t a l .( 1990) sophisticated postauditing can directlyreduce the AI associated with central manage-ments limited ability to observe the outcomesof capital investments. Second, lower levelmanagers who know that sophisticated post-auditing information is available to central

management will be more likely, ceteris paribus,to exert a higher level of effort as compared tothose managers whose work is not postaudited(Baron & Besanko, 1984).2 Hence, sophisticatedpostauditing can indirectly mitigate the agencyproblem associated with central managementsinability to observe the effort level of lower levelmanagers (i.e. the moral hazard problem).Third, sophisticated postauditing can provideinformation to central management regardingthe actual states of nature surrounding the

capital investment decision. As a result, asnoted by Antle & Eppen (1985) sophisticatedpostauditing can indirectly mitigate the problemassociated with ex ante private information oflower level managers (i.e. the adverse selectionproblem). While the above describes thepotential benefits of s o p h i s t i c a t e d postauditing,there is an important caveat to consider:sophisticated postauditing is not without cost.Hence, while some firms may find a highlysophisticated postaudit system to be mostcost beneficial, others may find that a lesssophisticated system is more appropriate totheir needs.

In order to consider SPA more carefully, we

FIRM PERFORMANCE 743

will begin by more explicitly describing therelationship between AI and the benefits (B) andcosts (C) of postauditing. Let us define threelevels of sophistication: low sophistication

(LS), medium sophistication (MS), and highsophistication (HS). Even at low levels of AI, thebenefits of postauditing may be quite substantial,due to the fact that a postaudit system providesvaluable information about outcomes. In addi-tion, for all levels of sophistication, the benefitsof postauditing increase with AI, since post-auditing helps mitigate AI related problems.Further, since central management becomesmore and more dependent on lower levelmanagement as AI increases, the marginal

benefits of postauditing at all levels are believedto be positive and at least constant, if notincreasing. More specifically,

6B Zi2BE 0; - 3 0.

6AI2

Finally, the marginal benefits of a more sophisti-cated system are expected to be greater than themarginal benefits of a less sophisticated system, or

6Bns 6BMMS 68,

KI->- > 0.6AI 6AI

That is, as AI increases, lirms receive greaterbenefits from more sophisticated systems.Hence, for a given level of AI, BHS>BMs>BIS isassumed to always hold.

The costs of postauditing (C) can also besignificant. Many firms do not collect informa-tion in a form which facilitates postauditing, andhence, must adapt their information systems togather and process such information (Gordon& Pinches, 1984). Therefore, part of the cost ofpostauditing is lixed. In addition, as AI increases,the difficulty associated with collecting validinformation also increases. However, it is

This postauditing could be performed by central management, by an independent department, by consultants, or possiblyby the lower level managers themselves, as long as the information is available to central management. While lower levelmanagers may have internal practices with respect to postauditing, this study is only concerned with postauditing systemswhich provide information to central management.

* Baron & Besanko (1984) assume that an optimal incentive plan is not currently in place.


4/17


believed that the marginal cost of postauditing(resulting from an increase in AI) should declineonce the proper procedures are in place.Therefore, it is expected that, for all levels of

sophistication, costs rise with increases in AI,but at a decreasing rate. More specifically,

6C S2C.-co.

KG O, &AI2

In addition, the marginal costs from a highlysophisticated system are expected to be greaterthan the marginal costs of a system with lowsophistication. That is,

&IS G4s 6CL.5

->- > - > 0.6AI 6AI 6AI

Also, given that more sophisticated systemsshould be associated with greater fixed costs, itis expected that for a given level of AI,

costs nd enefit.5of Postauditing

B,

=,

Bu

CLJ

Asylmhclntamatian

Fig. 1. The effects of asymmetric information on the costsand benefits of postauditing. BHS, Benefits of high

sophistication; BhlS, benefits of medium sophistication; Bfis,benefits of low sophistication; CHs, costs of high

sophistication; CMs, costs of medium sophistication; CIS,costs of low sophistication.

Cns>CILIs>CLS. These benefit and cost relation-ships are illustrated graphically in Fig. 1. Notethat the benefits of postauditing are depictedlinearly. While it is likely that the marginal

benefits are increasing (as noted earlier), theyare conservatively represented as linear.

Since central management should choose(either explicitly or implicitly) the level ofpostauditing sophistication that yields thegreatest net benefits for the Iirm, a hypothesisabout the relationship between AI and SPAshould be be based on this concept of netbenefits. Figure 2 illustrates the relationshipbetween AI and the net benefits of SPA derivedfrom the relationships in Fig. 1 .3 As AI increases,

the level of SPA corresponding to the maximumnet benefits is hypothesized to first decrease,but then increase as AI becomes large. There-fore, at lower and higher levels of AI, morehighly sophisticated postauditing is expected tobe most cost beneficial, while at intermediatelevels of AI, less sophisticated postauditing isexpected to be most cost beneficial. That is, therelationship between AI and SPA is expected tobe that of an upward parabola or U-shape asshown in Fig. 2. The intuition underlying this

relationship is that costly sophisticated post-auditing may only be cost beneficial at low levelsof AI (where the costs are relatively low) andat high levels of AI (where the benefits arerelatively high).

Of course, other factors may affect theneed for sophistication in postauditing. Mostobviously, the need to consider the capitalintensity (CI) of a firm in empirical researchrelated to capital expenditures is well docu-mented (e.g. Klammer, 1972, 1973; Larcker,1983; Pike, 1984, 1986). Hence, given theresearch focus of this paper, it seems reasonableto expect SPA to be dependent on the capitalintensity of a Iirm. More specifically, as a Iirmbecomes more dependent on capital (relativeto other factors of production), it has sub-stantially more to gain (lose) from good (poor)

3 The scale of Fig. 2 is reduced in order to clarify the graphical detail.


5/17

POSTAUDITING AND

Net Em sof mstauditing

IsymmbicInfotmatirm

Fig. 2. The effects of asymmetric information on the netbenefits of postauditing. NBHs, Net benefits of high

sophistication; NBMs, net benefits of medium sophistication;NB,, net benefits of low sophistication.

controls over capital projects. Therefore, ascapital intensity increases, the sophistication ofpostauditing procedures is also hypothesized to

increase.In addition to capital intensity, which is arelative concept, it is also believed that theabsolute level of capital expenditures (CE) willbe associated with SPA. Since a portion of thecost of a postaudit system is Iixed, the netbenefits to be gained from postauditing are alsodependent on the magnitude of the expenditureswhich may be affected by such postauditing.Hence, as the level of capital expendituresincreases, the sophistication of postauditing isalso expected to increase.

FIRM PERFORMANCE 745

While asymmetric information betweenlower level managers and central managementprovides the opportunity for agency conflictsand, therefore, the need for SPA, the issue of

central management incentives is also expectedto be associated with the sophistication ofpostauditing systems.* Managers whose prefer-ences are closely aligned with those of share-holders will be likely to support the postauditprocedures most beneficial for the firm. In orderto help align the preferences of managers withthose of shareholders, many firms encouragesenior managers to hold significant ownershipin the firm (i.e. they encourage insider owner-ship (IO)). The basic argument is that managers

pay a higher proportion of the costs arising fromagency conflicts as insider ownership increases,and, hence, will be less likely to take actionswhich reduce shareholder wealth (Jensen &Meckling, 19~6).~ However, high levels ofownership are not a guarantee of convergenceof interests. Merck et a l . (1988) point out that,at higher levels of ownership managers becomeentrenched (i.e. they have enough power toguarantee their positions) and may tend towardnon-value-maximizing behavior. In addition,

Shleifer & Vishny (1989) argue that managersfurther entrench themselves by investing inassets which have a higher value undertheir management than under alternativemanagement. Further, these managers maydivest the firm of investments which are notconsistent with their skills and interests. In asimilar vein, many have argued that highownership stakes cause management to becomeexcessively risk averse and avoid higher risk(higher return) investments (e.g. see Lambert& Larcker, 1985). Hence, management with

4 A divergence of preferences between central and lower level management is assumed, otherwise the existence of AI ismoot in that there is no motivation for agency conflict. At the next level up, central management incentives affect theextent to which central management interests diverge from those of shareholders. Central management interests coulddiverge from those of shareholders in that (1) central management could become more aligned with the interests of lowerlevel management, or (2) central management interests could be independent of the interests of both shareholders andlower level managers. Rather than attempt to measure where the interests of central management actually lie, we electedto proxy the relationship between the interests of central management and those of shareholders,

There are, of course, other types of incentives that can align the interests of shareholders and managers, e.g. long-termincentive plans such as performance units (larcker, 1983). The firms included in the empirical study discussed in thenext section do not vary much with respect to the existence of long-term and short-term compensation incentive plans.


6/17


extreme values of ownership (i.e. low or- high)are viewed as maximizing shareholder wealthto a lesser extent than their peers with mediumlevels of ownership. Accordingly, central

managers with very low or very high insiderownership may be less interested in sophisti-cated postauditing systems in order to reducethe attention focused on dysfunctional decisions.More specifically, SPA is expected to be higher(ceteris paribus) at middle levels of ownershipand lower at extreme levels of ownership.Hence, the relationship between IO and SPA isexpected to be that of a downward parabola orinverted U.6

to the firm related variables discussed above(i.e. AI, CI, CE, and IO) which should result insuperior performance. In order to assess therelationship between performance and this SPA

match, a residual analysis model will beapplied. More specifically, the relationshipbetween the absolute value of the residuals fromequation ( 1) (ARES) and firm performance (P)can be investigated via the following model(Drazin & Van de Ven, 1985; Duncan & Moores,1989):

P=P+PiARES +E, (2)

The above discussion suggests the following

functional relationship:

where P =

ARES =SPA = PO - pi AI + p2 AI* + p3 CI + o4 CE

+ ps IO - 86 IO2 + E, (I)Pi =

where SPA =AI =CI =CE =IO =Pi =

E

sophistication of postauditing,asymmetric information,capital intensity,capital expenditure level,insider ownership,various model parameters, i=Oto 6, and

error term.

Equation ( 1) describes the hypothesizedrelationship between firm related variables andSPA. However, it is the appropriate m a t c h of SPA

firm performance,

absolute value of residualsfrom equation (I),various model parameters, i =0 to 1, anderror term.

The basic premise of the model is that theresiduals from equation ( 1) measure lack of fitof SPA to the Iirm related variab1es.s Therefore,if the basic arguments made in this paper arecorrect, the residuals (lack of fit) from equation

( 1) should be negatively associated withperformance in equation (2) (i.e. l3 1 in equation(2) is expected to be negative). The empiricalstudy, which examines the above relationships,is described below.

It is assumed that determination of the most cost beneficial level of sophistication is independent of IO. That is, incentivesof central management are only hypothesized to affect SPA with respect to w h et h er h e m o s t c o st b en e f i c i a l sy st e m w i l lbe np luce . Therefore, this discussion does not consider the possibility that SPA nd insider ownership may be substitutes.The issue of multiple control mechanisms in management control system design is a broad one, which has receivedrelatively li ttle attention. The design of the postaudit system should be included in future studies of management controlsystem design.

7 The purpose of this study is to investigate the hypothesis that the match of SPA to firm related characteristics is significantlyrelated to firm performance and not to provide an explanation of firm performance. The capital asset pricing model assertsthat risk is the consistent predictor of (stock market) performance. Accordingly, since we adjust the performance measuresfor the risk adjusted market return (as discussed in the empirical study described in the next section), a full model whichexplains performance is not necessary.

As an alternative to residual analysis, an interactive specification of the model could be utilized. Such a model wouldhypothesize that performance is a function of SPA, the additional firm-related variables, and their interaction. Apart fromthe difficulties in interpreting these results with multip le firm related variables, Drazin & Van de Ven (1985) point outthat interactive terms specifically model an acceleration effect on the dependent variable. We believe the residual analysisis a better test of the relationships being considered in this study.


7/17

POSTAUDITING AND 1 IRM PERFORMANCE 747

EMPIRLCAL STUDY results from this study specifically apply to verylarge firms.

S a m p l e

T h e sample included in this study is drawn

from the 1988 F o r t u n e 500 U.S. firms. After M e a su r em e n t o f v a r i a b l e seliminating firms with incomplete data, recent S op h i st i c a t i o n o f p o st a u d i t i n g p r o ced u r es.CEO changes, non-calendar year ends, CEOs T h e sophistication of postauditing procedureswhich are not on the Forbes list of most highly (SPA) variable is defined in terms of threepaid executives,O and firms not willing to dimensions. 3 The first dimension concernsparticipate in the study, 60 firms remained. whether cash flows or accounting data are usedFurther, since the sophistication of the invest- in the postauditing of capital projects. The usement selection process is related to the sophisti- of cash flows, as opposed to accounting data,cation of postauditing, the sample is limited to represents the more sophisticated approach toonly those firms which use risk adjusted the control process because: (a) if expecteddiscounted cash-flow techniques in selecting cash flows are used in selecting projects,

investments. More specifically, firms must be congruency requires that the actual cashusing the above techniques for at least a flows be compared to the expected values insignificant portion of the dollar value of invest- evaluating a projects performance to datements in profit generating projects (i.e. as (Baxendale & Levitan, 1987; Gordon & Myers,opposed to must-do projects). All of the 60 1991; Seed, 1990) and (b) the decision offirms met this criteria. whether or not to abandon a project requires

Of the 60 firms, 16 indicated that postauditing an analysis of the present value of future cashcapital expenditures is not a specifically indenti- flows (Robichek & Van Horne, 1967; Joy, 1976;fiable activity. * In addition, two firms were Myers et a l . , 1991).eliminated due to the fact that their capital The second dimension concerns the frequencyintensity is over six standard deviations above of postaudits. That is, it makes a difference

the mean of the remainder of the sample. Hence, whether capital projects are postaudited morethe final sample included in this study consists than once as opposed to on a one-time-only basisof the remaining 42 firms. Firms in the final (e.g. after a fixed number of years or at thesample have significantly larger average values completion of the project). A capital projectof sales and market value than the remainder of may become a poor performer at any time inthe Fortune 500 (a


8/17


projects life is usually not adequate for propercontrol. * Accordingly, the one-time-onlyreview is less sophisticated than an on-goingreview process.

The third dimension of SPA concerns theextent to which the postaudit procedures areused. This is measured as the percentage ofcapital projects (in terms of dollar values)postaudited by a firm. In this regard, the largerthe percentage the higher the SPA associatedwith a ftrm. The participants often responded tothis question with a range instead of a pointestimate. Without exception, these rangesencompass less than a lo-point spread. In thesecases, the simple average of the range endpoints

is used. The percentage is standardized by thesample mean and standard deviation so that (thescale of) this variable does not overwhelm thescore horn the types of procedures used.15

Postoudit mjectx 1 2o r J y *

P o s t a u d i t r o i ec r s 2 3More an nce

Fig. 3. Sophistication of postauditing procedures.

lirst two dimensions (i.e. 1, 2, or 3 from Fig. 3)and the extent to which the procedures areapplied. Hence, SPA is measured as a positive,

bounded continuous variable.

The coding of the SPA variable proceeds asfollows: The first two dimensions are coded asillustrated in Fig. 3. Firms that use accountingdata and conduct postaudits only once duringthe life of a project receive a score of 1. Firmsthat either use cash flow data and conductpostaudits only once during the life of a project

or use accounting data and postaudit projectsmore than once in their lives receive a score of2. Although these two cases may differ, it isbelieved that neither one clearly dominates interms of SPA. In contrast, these lirms clearlydominate those which both use accounting dataand postaudit only once in the life of a project.Finally, firms which use cash-flow data andpostaudit projects more than once duringtheir lives are considered to use the mostsophisticated postauditing procedures and

receive a score of3 The

index of SPA is thenconstructed as the product of the score on the

Since the information related to all threedimensions of SPA noted above are not publiclyavailable, firms had to agree to participate in thestudy by providing us with such data. Theinformation on SPA was gathered via telephoneinterviews with executives from centralmanagement. There are two reasons why thetelephone interview approach is utilized for thisportion of the study. First, since postauditing isan activity which often does not have a

universally recognized home in the organiza-tion, it is critical to make sure that the personproviding the necessary information is familiarwith central managements postauditingrequirements. l7 Telephone interviews permitthe identification of such persons. Second, sincecompanies use significantly different termino-logy in reference to postauditing, it is felt thatthe opportunity to clarify the questions con-cerning the required information is also critical.Telephone interviews permit such clarification.

Criticisms of telephone interviews include thefact that they must be short, sometimes at the

I4 A single postaudit may be adequate for a very short-lived project. However, all firms in the sample reported that theircapital assets have lives, on average, of greater than five years.

I5 In addition, a constant of five (5) is added to the standardized percentage, to maintain a positive measure of SPA.

I6 As noted in the section on sample selection, all firms in the sample are using sophisticated techniques in the se l ec t i onof capital expenditures. This too is determined via the telephone interviews.

Managers taking part in the study hold senior positions such as controller, treasurer, and senior capital expenditureanalyst, among others. The participants average almost six years in their present positions.


9/17

POSTAUDITING AND FIRM PERFORMANCE 749

expense of adequate detail, and the fact thatpersonal aspects of the interviewer may bias theresults. One person interviewed all the firmsand great care was taken to present the

questions consistently. Hence, for this study, webelieve the advantages of telephone interviewsoutweigh the disadvantages.

F i r m p er f o r m a n c e, Firm performance (P) isdefined as a long-term excess return to share-holders. It is measured in part by using theF o r t u n e 5 0 0 ten-year compounded averagereturn (R{) for the period ending 1988 (Lilienet a l . , 1988). The F o r t u n e measure of return toinvestors includes both price appreciation anddividend yield. Proceeds from cash dividends,

the sale of rights, warrants, etc., were assumedto be reinvested when they were paid.Adjustments were made for stock splits, stockdividends, recapitalization and reorganizations.However, simple returns alone are not anadequate measure of firm performance, sincetwo lirms with the same return to investors butdifferent levels of risk cannot be consideredequal performers. Therefore, performance isdefined using Jensens alpha in order to adjustfor the risk-adjusted market return (see Kolodney

et a l . , 1989, for a discussion of several methodsto adjust for risk). Hence, firm performance isdefined as follows:

Pi = Ri

where Pi =Ri =R, =Rf =P

A s y m m e t r i c

- Pf + PXRm )I,Performance for Iii-m i ,Return for firm i,Return for the market,Risk tree rate of return,Beta for firm i . 1 8

i n f o r m a t i o n . In a theoreticalsense, AI arises when the agent (principal)possesses information that the principal (agent)does not possess. The AI of interest in this studystems from lower level managers (i.e. agents)having information not available to centralmanagement (i.e. principals). That this AI existsis not at issue. Indeed, Kaplan & Atkinson ( 1989,

p. 526) note that . . . perhaps the strongestfactor leading to decentralization is the difficultyif not impossibility of sharing all local informa-tion with central management. What is at issue,

however, is the degree of this AI phenomenon.In the current study, AI is measured using fourdistinct components.

One aspect of the degree of AI betweencentral and lower level managers is lit-m size(SIZE). Larger firms tend to have more hier-archical levels (Chandler, 1962; Williamson,198 1) and in turn greater AI (of the nature beingconsidered here) than smaller ones. In this latterregard, Williamson (1967, pp. 126127) notedsome time ago that:

. . . expansion of the organization (adding an additionalhierarchical level) removes the superior further fromthe basic data that affect operating conditions; informa-tion regarding those conditions must now be transmittedacross an additional hierarchical level which exposes thedata to an additional serial reproduction operation withits attendant losses. Furthermore, the top executive orpeak coordinator cannot have all the information hehad before the expansion plus the information nowgenerated by the new levels (assuming he was fullyemployed initially). Thus, he can acquire additionalinformation only by sacrificing some of the detailprovided to him previously he has more resourcesunder his control, but the quality and quantity ofhis information are both less with respect to thedeployment of each resource unit

Accordingly, lirm size is one of the dimensionsof AI considered in this study. It is measuredbased on a COMPUSTAT derived three-yearaverage (19861988) of firm net sales. A three-year average is chosen to reduce any biasassociated with using only one annual salesfigure.

Another aspect of AI is the diversification(DIV) of a firms product lines. In the diversifiedcompany, central management has to deal withsubstantially different sub-businesses, each withits own set of concerns (Hall, 1987). Thissituation introduces . . an additional level ofcomplexity for top management to deal with in

I8 The return to the market (R,) is estimated as the average lo-year return to investors for the Fortune 500. While thisoverstates the market return, the overstatement is consistent across firms and provides a more conservative measure ofexcess performance. The risk free rate (Rr) is calculated as the IO-year average of the annuaI treasury bill rate. Betas (I3,)were obtained from the Standard & Poors Stock Reports for the period ending closest to 31 December 1988.


10/17


Model (wi th expect s u):

SPA = R, - 0, AI + B, AI* + I , CI + 0, CE +0, IO - 0, Id + c (equation 1)

P=D,-B,AREs+~ (equation 2)

SPA = Sophistication of P&auditing= (Score on l&es of Postaudi t ing Procedures) x

(Extent to Whi ch Procedures are Ut il ized)

AI

CI

= Asymmetric Information= SIZE + DIV + IhT + VE

w here SIZE = Av erage Net SalesDI V = Number of Dt rerent 2-digit SIC CodesI T = Number of Di gerent Countri es

VE = Standard Deviadon of Earnin gs

= Capital Intensity= Average Net Fixed Asset s/Av erage Number of Employ ees

CE = Capital Expenditures= Average Level of Capital Expenditures

IO = Insider Ownership= Percent age of Fir m O w ned by OJicers and Di rectors

P = Firm Performance= Long Term Excess Retur n to Inv esto rs

ARES = Absolute Value of Residuals from Equation 1= Lack of Fit betw een SPA and (AI , Cl, CE, and IO )

Fig. 4. Model and measurement summary

trying to understand the variety of industries inwhich the businesses operate (Hall, 1987, p.84). For example, consider two firms of similarsize in terms of total sales. The first Iirm has 20subunits that each produce and sell 100 unitsof the same product line. The second Iirm has20 subunits that each produce and sell 100 unitseach of d i f f e r e n t product lines. The level ofAI between subunit managers and centralmanagement generally will be higher in thesecond firm than the first one. Although thisexample represents an extreme situation, thesame argument would hold for more realisticsettings where various subunits handle multipleproduct lines. Hence, DIV, defined as thenumber of different two-digit SIC codes listed

for each firm in DISCLOSURE (1988) is used asthe second component of our AI measure.

The degree to which a company is inter-nationalized (INT) is also believed to increasethe degree ofAI between central and lower levelmanagers (Newman, 1989). At the extremes,firms which conduct business only in the U.S.should have less AI than iirms which operate inmany countries around the world. This is due,in part, to the fact that top management ininternational firms must assimilate informationabout many markets and cultures as well asinformation about domestic issues related to thefirm. Further, as Williamson (1981, p. 1562)notes in discussing the information asymmetryproblem related to multinational enterprises:


11/17


Markets for information are apt to be especiallycostly and/or hazardous when transmission acrossa national boundary is attempted. Accordingly,INT is used as another dimension of AI, and is

defined as the number of different countries inwhich a firm operates, based on the 988D i r e ct o r y o f A m er i c a n F i r m s Op er a t i n g i nF o r ei g n C o u n t r i e s.

Firms with higher variations in earnings (VE)must deal with additional uncertainty in themanagement process. Increased uncertaintyusually results in additional information require-ments. These additional information require-ments are often accompanied by additionallevels of management. This, in turn, leads toincreased private information on the part oflower level management. Thus, increased varia-tion in a Iirms earnings often results in increasedAI. Hence, the last measurement component ofAI utilized is measured by the lirms standarddeviation of earnings before extraordinaryitems. The measurement of VE is based on theIirms earnings for the five years ending 1988,as reported by COMPUSTAT.

Based on the above four components, anindex of AI is constructed. The index isconstructed as follows:*

AI = SIZE + DIV + INT + VE.

All four variables are standardized using thesample mean and standard deviation to adjustfor scale differences. A constant of five (5) isalso added to each (standardized) variable toachieve a consistently positive scale, whichfacilitates the testing of a multiplicative index.

C a p i t a l i n t en s i t y /c a p i t a l ex p en d i t u r es. T h e

decision to spend relatively more on capital (i.e.become more capital intensive) vis -h .v is otherfactors of production should, on a priori grounds,

lead to a greater emphasis on the postauditing ofcapital expenditures. One measure of a firmsrelative capital intensity (CI) is the capital perunit of labor utilized. Accordingly, capitalintensity is measured as net fixed assets dividedby number of employees (Pike, 1984, 1986).Both the numerator and the denominator arethree-year (19861988) averages, obtainedfrom COMPUSTAT. The level of capital expend-itures (CE) is measured as a three-year (1986-1988) average of capital expenditures, obtainedfrom COMPUSTAT. As is the case with SIZE,three-year averages are chosen to reduce thepossibility of bias related to the use of only oneannual data point. In addition, both of thesevariables are subjected to a square root trans-formation, to better approach normality.

I n s i d e r o w n e r s h i p . Insider ownership ismeasured as the percentage of the outstandingshares owned by officers and directors.*l Thesedata are based on SEC information in theDISCLOSURE database as of December 1988.The entire model and variable definitions are

summarized in Fig. 4. Descriptive statistics areshown in Table 1.

STUDY RESULTS**

The first step in conducting the residualanalysis is to estimate the function whichdescribes the association between the firm

I9 This component of AI captures the environmental uncertainty confronting a Iirm. Hence, whereas ChenhaU & Morris(1989) consider environmental uncertainty as a variable which directly moderates the performance-postauditingrelationship, we view it as a subcomponent of AI.

* Factor analysis is often used to measure one construct with several variables by assuming that each of the variablesmeasures the construct with error (latent variable anafysis). However, we do not believe that each of these variablesmeasures AI (with error). Rather, each of these variables measures a different component or aspect of AI. Hence, factoranalysis is not appropriate in this case.

a Merck ei al. ( 1988) discuss management ownership as separate from board of directors ownership. Our concern in thisstudy is to measure incentives for those senior managers in control of the Iirm (i.e. central management). However, seniormanagers are often on the board of directors. Further, Merck et al. ( 1988) find that the relationship between managementownership and performance was very similar to that of board ownership and performance. Accordingly, this issue is notexpected to significantly aIfect the study results.

** As noted earlier, the analyses presented are based on Jensens alpha as the performance measure. Although not shown,the results to be discussed are substantially the same using Treynors measure of performance (Kolodny e t a l . , 1989).Consistent results are also found using a multiplicative index of AI (i.e. SIZE*DIV*INT*VE).


12/17


TABLE 1. DescriDtive statistics

Variable Mean SD. Skewness Kurtosis Min MaX

SPA 11.94 5.043 0.214 2.066 4.21 20.97AI 19.70 2.140 1.061 3.933 15.9 25.43

Cl 5.01 2.271 2.216 10.020 2.59 15.09CE 7.49 4.405 1.038 3.095 2.43 18.08IO 4.86 6.261 2.383 8.002 1.00 28.00P 0.91 7.793 0.445 2.779 -12.9 21.32

SPA, Sophistication of postauditing; AI, asymmetric information; CL capital intensity; CE, capital expenditures; IO, insiderownership; P, firm performance.

related variables and the level of postauditsophistication. This step could include all firmsin the sample. However, a cogent argument canbe made that the highest performing firms are

the ones which have developed the mostappropriate level of SPA (Van de Ven & Ferry,1980). Based on this argument, the SPA equation(equation ( 1)) should be derived from thehighest performing firms. Hence, for the pur-poses of this study, the relationship between SPAand the firm related variables in equation ( 1) isestimated using those firms with long termexcess performance of greater than 2 (n =16). The mean of the performance variable forthe entire sample (n= 42) is 0.91 ; the ex-

pected population mean is zero. The cutoff of2 was chosen since (a) it is above both theexpected mean and the actual mean, and (b) anatural break in the values of the performancevariable occurs between 1.26 and 2.15 .

The results of the regression are presented inTable 2. Since the number of high performersis relatively small, the application of a jackknifeprocedure (Efron, 1982) is considered import-ant to provide further assurance regarding thesignificance of the parameter estimates. Jack-knifed standard errors provide virtually identicallevels of significance. In addition, the results aresubstantially the same if the high performingsample is defined differently (i.e. using 17, 18,or 19 lirms as opposed to 16). Hence, the resultsare robust with respect to variations in thedefinition of the high performing sample.

The intercept in the model is very large,which suggests that highly performing lirmstend to have highly sophisticated systems. Asexpected, the sophistication of postauditing is

TABLE 2. Regression of sophistication of postauditing onfirm related variables for high performing Iirms (n= 16)

Equation (with expected signs):

SPA = go - P,AI + B&I* + B&I + B&E+ PSI0 - Bdoa + E

Actualcoefficient

Significancelevel

337.35 0.0004-31.83 0.0001

;: -1.21.76 0.0007.017484 0.34 0.1008P5 2.09 0.00073fi -0.07 0.0018

R2 = 0.848; adjusted R = 0.747; significance ofF-test: 0.002.

SPA, Sophistication of postauditing; AI, asymmetricinformation; CI, capital intensity; CE, capital expenditures;IO, insider ownership.

related to asymmetric information in a U fashion.More specifically, increases in the asymmetry ofinformation first reduce the level of SPA andthen increase it. The partial derivative ofequation ( 1) with respect to AI produces aminimum of approximately 2 1. This is the pointat which increases in AI begin to increase SPAand is approximately one-half S.D. above the(AI) mean. Hence, at lower (higher) levels ofAI, SPA has a negative (positive) relationshipwith AI.

Also as expected, the sophistication of post-auditing is related to insider ownership in aninverted U fashion. That is, increases in owner-ship at lower levels (of ownership) are as-sociated with increases in SPA, but increases inownership at higher levels are associated with


13/17


TABLE 3. Regression of Iirm performance on absolute valueof residuals for full sample (n=42)

Equation (with expected signs):P=po-j3,AREs+&

PO81

Actual Significancecoefficient level

3.884 0.0046-0.284 0.0004

R* = 0.272; adjusted R = 0.253; significance of F-test:0.0004.P, Firm performance; ARES, absolute value of residuals fromequation ( 1).

decreases in SPA. The partial derivative ofequation ( 1) with respect to insider ownershipproduces a maximum of approximately 15 .Hence, at approximately 15 insider ownership(i.e. 1.6 S.D.s from the IO mean), the positiverelationship between IO and SPA becomes anegative relationship. Given that ownership isdefined as both management and directorownership, 15 seems consistent with thefindings of Merck e t a l . (1988) regardingIO. These results support our conceptual

arguments.The CE variable is positively related to SPA,

as expected. The CI variable, however, is notrelated to SPA in the hypothesized direction.This may be due to the fact that the sample firmsare all relatively capital intensive (refer to Table1) The overall model is a good fit, as evidencedby the adjusted R 2 and the F-test. In conclusion,SPA in high performing lirms is significantlyassociated with asymmetric information, insiderownership, capital intensity and level of capital

expenditures.While the first step of this analysis models theassociation between SPA and the tirm related

variables (i.e. equation ( 1) above) based on thehighest performing firms, the next step measuresthe lack of fit of each firm as compared to thismodel and investigates the relationship of this

lack of fit with lirm performance. This steptraditionally involves calculating the residualsfor all firms in the sample using the parametersderived from the model (shown in Table 2).However, to increase the validity of the process,a holdout procedure is used to calculate theresiduals for the high performing firms whichare used to estimate equation (1). Morespecifically, in order to calculate the residual forthe 16 high performing Iirms, each firm is heldout in turn (with replacement), while the

remaining firms (a= 15) are used to re-estimatethe model (i.e. equation( 1)). Then, the residualis calculated for the holdout firm, thereby usingparameters calculated from a sample which donot include that firm. This process is followedfor each of the I6 high performing lirms.23 Theresiduals for the remainder of the 42 firms inthe sample are calculated using the parametersin Table 2.

The absolute value of these residuals repre-sents the lack of fit of SPA to the firm related

variables in this study. As shown in Table 3,these residuals are negatively associated withfirm performance for the full sample of lirms2*Hence, as expected, l a c k o f f i t of postauditingsystems to relevant lit-m related variables isassociated with decreased lirm performance.More specifically, increasing the lack of fit byone unit decreases performance (i.e. long-termexcess return to shareholders) by 0.284 . Theadjusted R 2 indicates that this relationshipexplains approximately 25 of the variation in

firm performance. In addition, the F-test(a=0.0004) is highly significant. Therefore, thehypothesis that firm performance is not related

23 Calculating the residuals for the entire sample based on the parameters from the original sample of 16 provides analogousresults. In fact, the correlation between the residuals calculated from the holdout procedure and residuals calculated fromthe original model is 0.998.

** Recall that Firm performance is defined as an excess over the risk adjusted market return. Hence the performancevariable can be thought of as a long-term excess return.


14/17

754 L. A. GORDON and K. J. SMITH

TABLE 4. Regression of Iirm performance on absolute vahteof residuals for firms with positive vs negative residuals

Equation (with expected signs):P = PO - p,AREs + E

Too sophisticated: Not sophisticated enough:Positive residuals Negative residuals

(n= IS) (n=24)

PO 7.299 2.070(0.001) (0.229)

B1 -0.545 -0.176(0.000) (0.055)

Significance levels are in parentheses.R2 = 0.56; Adj. R2 = 0.53; R2 = 0.16; Adj. R2 = 0.12;significance of F-test: 0.0003 significance of F-test: 0.044

P, Firm performance; ARES, absolute value of residuals fromequation ( 1).

to the match between SPA and the selected firmrelated variables is rejected.25

Comparing the absolute value of the residuals(i.e. lack of fit) to performance for the full sampleassumes that negative and positive residualshave the same effect on performance. Morespecifically, the analysis assumes that the per-formance of firms is affected the same waywhether the firms have a postaudit system thatis too sophisticated (i.e. residuals are positive)

or not sophisticated enough (i.e. residuals arenegative). Conceptually, we do not believe thisshould be the case. While firms which are toosophisticated are in a situation where the costsof SPA outweigh the benefits, this net cost canbe relatively trivial compared to the lossesexperienced by lirms which have postaudit

systems that are not sophisticated enough. Inorder to investigate this point, the sample wasdivided into two groups: positive vs negativeresiduals. The relationship between perfor-

mance and lack of fit was then assessed for eachsubgroup. The results of these analyses arepresented in Table 4. The relationship betweenperformance and lack of fit is negative forboth subgroups; however, there are importantdifferences. In the first place, the intercept ismuch higher for the subsample of firms whosepostaudit systems were too sophisticated (i.e.firms with positive residuals). In fact, theintercept for the firms which are not sophisti-cated enough (i.e. firms with negative residuals)

is not significantly different from zero. Hence,the use of more sophisticated postauditing thanis presumably necessary (per our model) tendsto be associated with substantially higher perfor-mance on average. Further, as lack of fit increases,the use of a system which is too sophisticatedcontinues to be associated with higher perform-ance relative to systems which are not sophisti-cated enough.26 Accordingly, having a postauditsystem which is not sophisticated enough isassociated with lower Iirm performance than

having a system which is too sophisticated. Thisfinding squares nicely with intuition.

CONCLUDING COMMENTS

The results of this study empirically supportand substantially extend the argument that the

*5 It has been suggested that the SPA variable may be serving as a proxy for the sophistication of the overall financialmanagement system and that our results are driven by this overall sophis tication. While this is possible, we have reasonto believe it is not the case. Scapens & Sale (19SS) find postauditing to be significantly correlated only with investmentselection techniques (hence our control feature), and not with the other aspects of a Iirms financial management systemexamined in their study. In addition, while asymmetric information (AI) and insider ownership (IO) might logically berelated to the sophistication of the entire tinancial management system, this is less likely to be the case for the capitalintensity (CI) and capital expenditures (CE) variables. Hence, the fit of SPA to the current set of firm related variables isprobably not a good proxy for the fit between the sophistication of the overall financial management system and the firmrelated variables relevant to the system as a whole. In other words, we do not attribute the significance of our results toa correlation between SPA and the overall financial management sophistication.

26 It appears, from Table 4, that this relationship only holds for a time. That is, the results seem to show that firms whichare not sophisticated enough would have lower performance only for a time (i.e. the regression lines would cross). Thisis true if we assume that the scales for positive and negative residuals are the same. In fact, this is not the case. Morespecifically, the positive residuals range from zero to 15.47, while the negative residuals range from zero to -61.86. Hence,a simple comparison is not appropriate. If we consider the relationship between the two regression lines using quartilevalues of each sample, we find that Erms with postaudit systems that are not sophisticated enough (i.e. negative residuals)do indeed exhibit lower performance than their too sophisticated (i.e. positive residuals) counterpar ts at aII quartile values.


15/17


use of sophisticated postauditing procedures isassociated with Iirm performance. More specifi-cally, the key results of this study suggest thata tit-ms long-term excess return to shareholders

is associated with the proper match betweenthe level of postauditing sophistication and thefollowing Iirm related variables: asymmetricinformation between central and lower levelmanagers, capital intensity, capital expenditurelevels and insider ownership. Nevertheless,given the limited sample size and difficulty inmeasuring some of the variables included in ourmodel, generalizability of these findings requiresfurther empirical verification. Future researchto refine the measurement of AI seems particularly

warranted in light of the importance of thisvariable to various research issues.

system (Pike, 1988 , both through its inter-action with planning mechanisms and its inter-action with other control mechanisms. Hence,fruitful areas for research might include more

explicitly modelling the interaction betweeninvestment selection and investment control,as well as examining the mix of controlmechanisms. Asymmetric information would beexpected to have great importance in exploringboth of these issues.

BIBLIOGRAPHY

Postauditing of capital projects is but one ofan organizations control mechanisms used toreduce agency related problems. Accordingly,future research also needs to incorporatepostauditing into the entire financial control

Finally, we have viewed information asym-metry as a key issue affecting the postauditingof capital expenditures. This perspective couldbe specifically a function of the business culturein the United States. On a broader scale, the

agency problems induced by asymmetricinformation may vary depending upon thecountry in which it is being studied. Hence,another potential area for future researchwould be to investigate management controlissues, such as postauditing, on a cross-culturalbasis.

Antle, R. & Eppen, G., Capital Rationing and Organizational Slack in Capital Budgeting, M a n a g e m e n tSc i ence 1985) pp. 163-174.

Baron, D. P. & Besanko, D., Regulation, Asymmetric Information, and Auditing,Rand~ournalofEconomzcs(Winter 1984) pp. 447-470.

BaxendaIe, S. J, & Levitan, A. S., The Postaudit Review of Equipment Replacement Decisions in CapitalIntensive Companies, J o u r n a l of Cost A n a Z y s i s Summer 1987) pp. 7-16.

Chandler, A., S t r a t eg y a n d S t r u c t u r e : C h a p t e r s n t h e H i st o r y o f t h e n d u st r i a l E n t er p r i s e Cambridge,MA: MIT Press, 1962).

ChenhalI, R. & Morris, D., Post Completion Audits, Feedback Related Learning, Managerial Performanceand Attitudes to Capital Budgeting, Paper presented at the 1989 Management Control Conference heldat the London Business School.

Christy, G. A., C a p i t a l B u d g e t i n g - C u r r e n t P r a c t i c es a n d T h e i r E f f i c i e n c y (Bureau of Business andEconomic Research, University of Oregon, 1966).

Corr, A. V., T h e C u p i t a l E x p en d i t u r eD e ci s i o n (Momvale, NJ: National Association of Accountants, 1983).Chu, L. & Hertenstein, J., Case Study of General Cinemas Post Completion Reviews, (Boston, MA: H B S

Ca se Ser vi ces, Harvard College, 1986).Drazin, R. & Van de Ven, A. H., Alternative Forms of Fit in Contingency Theory, A d m i n i s t r a t i v e S c i e n c e

Q u a r t er l y ( 1 98 5) pp. 514-539.Duncan, K & Moores, K, Residual Analysis: a Better Methodology for Contingency Studies in Management

Accounting, J o u r n a l o f M a n a g e m en t A c c ou n t i n g R esea r c h Fall 1989) pp. 89-103.Efron, B., T h e a c k k n t y e, h e B o ot s t r a p a n d O t h e r R esa m p l i n g P l a n s (Bristol: J. W. Arrowsmith, 1982).Emmanuel, C. R. & Otley, D. T., A c c o u n t i n g f o r M u n a g e m e n t C o n t r o l Berkshire: Van Nostrand Reinhold

(UK) Co. Ltd. 1985).Fama, E. F., Risk-Adjusted Discount Rates and Capital Budgeting Under Uncertainty, J o u r n a l o f F i n a n c i a l

E conom i cs ( 1977) pp. 3-24.


16/17


Gordon, L. A., Benefit-Cost Analysis and Resource Allocation Decisions, Accounting, Organizations andSoc ie ty (1989) pp. 247-258.

Gordon, L. A. & Myers, M. D., Postauditing Capital Projects: Are You in Step with the Competition?Management A c c o u n t i n g (January 1991) pp. 39-42.

Gordon, L. A. & Pinches, G. E., I m p r o v i n g C a p i t a l B u d g et i n g : a D ec i si o n S u p p o r t S yst em A p p r o a c h(Boston, MA: Addison-Wesley, 1984).

Gordon, L. A., Loeb, M. & Stark, A., Capital Budgeting and the Value of Information, M a n a g e m e n tA c c o u n t i n g R e sea r c h 1990).

Gulliver, F. R., Post-project appraisals pay, H a r v a r d B u s i n e ss R e vi e w (March-April 1987) pp. 128-130.Haka, S. F., Capital Budgeting Techniques and Firm Specific Contingencies: a Correlational Analysis,

A c c o u n t i n g O r g a n i z a t i o n s a n d So c i et y 1 9 87 ) pp. 31-48.Haka, S. F., Gordon, L. A. & Pinches, G. E., Sophisticated Capital Budgeting Selection Techniques and Firm

Performance, A c c o u n t i n g R e vi e w (1985) pp. 651469.Hall, G. E., Reflections on Running a Diversified Company, H a r v a r d B u s i n e ss R e vi e w ( 1 9 8 7) pp. 84-92.Howell, R. A., Brown, J. D., Saucy, S. R. & Seed, A. H., M a n a g em e n t A c co u n t i n g i n h eN e w M a n u f a c i u r i n g

E n v i r o n m e n t (MontvaIe, NJ: National Association of Accountants, 1987).Jensen, M. C. & Meckling, W. H., Theory of the Firm: Managerial Behavior, Agency Costs and Ownership

StNcture,Journat o f F i n a n c i a l E c on o m i c s ( 19 7 6) pp. 305-360.

Joy, M., Abandonment Values and Abandonment Decisions: a Clarification, J o u r n a l o f F i n a n c e ( 1 97 6)pp. 1225-l 228.

Kaplan, R. &Atkinson, A . , A d v a n c e d M a n a g e m e n t A c c o u n t i n g (Englewood Cliffs, NJ: Prentice-Hall, 1989).Kim, S. H., An Empirical Study on the Relationship Between Capita1 Budgeting Practices and Earnings

Performance, E n g i n eer i n g E c o n o m i s i (Spring 1982) pp. 185-196.King, P., Is the Emphasis of Capital Budgeting Theory Misplaced? J o u r n a l o f B u s i n e ss F i n a n c e a n d

A c c o u n i i n g (Spring 1975) pp. 69-82.Klammer, T. P., Empirical Evidence on the Adoption of Sophisticated Capital Budgeting Techniques,

J o u r n a l o f B u s i n e ss ( 1 9 72 ) pp. 387-397.Klammer, T. P., The Association of Capital Budgeting Techniques with Firm Performance, A c c o u n t i n g

Rev iew ( 1973) pp. 353-364.Kolodny, R., Lawrence, M. & Ghosh, A., In Search of Excellence.. .For Whom? J o u r n a l o f P or t f o l i o

M a n a g e m e n t (Spring 1989) pp. 5tiO.Lambert, R. & Iarcker, D., Executive Compensation, Corporate Decision Making and Shareholder Wealth:

a Review of the Evidence, M i d l a n d C or p o r a t e F i n a n c e o u r n a l (Winter 1985) pp. 6-22.Iarcker, D., The Association Between Performance Plan Adoption and Corporate Capital Investment

J o u r n a l o f A c co u n t i n g a n d E c on o m i c s ( 19 83 ) pp. 3-30.Lilien, S.,Mellman, M. & Pastena, V., Accounting Changes: Successful Versus Unsuccessful Firms,

A c c o u n i i n g R ev i e w ( 1 9 8 8) pp. 642-656.Merck, R., Shleifer, A. & Vishny, R. W., Management Ownership and Market ValuationJournal o f F i n a n c i a l

E conom ics ( 1988) pp. 293-3 15.Myers, S. C. & Turnbull, S. M., Capital Budgeting and the Capital Asset Pricing Model: Good News and

Bad News, J o u r n a l o f F i n a n c e ( 1 97 7) pp. 321-332.Myers, M. D., Gordon, L. A. & Hamer, M. M., Postauditing Capital Assets and Fiim Performance: an

Empirical Investigation, M a n a g er i a l a n d D e ci s i o n E c on o m i c s (August 1991) pp. 317-327.Newman, H., Selection of Short-Term Accounting-Based Bonus Plans, A c c o u n t i n g R ev i e w ( 1 9 8 9) pp.

758-772.Pike, R H., Sophisticated Capital Budgeting Systems and Their Association with Corporate Performance,

M a n a g e r i a l a n d D e ci s i o n E c o n o m i c s ( 1 9 84 ) pp. 91-97.Pike, R. H., The Design of Capital Budgeting Processes and the Corporate Context, M a n a g er i a l a n d

Dec i s ion E conom i cs ( 1986) pp. 187-195.Pike, R. H., An Empirical Study of the Adoption of Sophisticated Capital Budgeting Practices and Decision

Making Effectiveness, A c c o u n i i n g a n d B u si n ess R e sea r c h 1 9 88 ) pp. 341-351.Robichek, A. A. & Van Horne, M. C., Abandonment Value and Capital Budgeting, J o u r n a l o f F i n a n c e

(1967) pp. 577-589.Rosenblatt, M. J. & Jucker, J. V., Capital Expenditure Decision-Making: Some Tools and Trends, I n t e r f a c e s

(1979) pp. 63-69.Rubenstein, M. B., A Mean-Variance Synthesis of Corporate Finance Theory, J o u r n a l o f F i n a n c e ( 1 9 73 )

pp. 167-182


17/17


Scapens, R. W. & Sale, J. T., Performance Measurement and Formal Capital Expenditure Controls inDivisionalized Companies, J o u r n a l o f B u s i n e ss F i n a n c e a n d A c c o u n t i n g Autumn 1981) pp. 389-420.

Scapens, R. W. & Sale, J. T., An International Study of Accounting Practices in Divisionalized Companiesand Their Association with Organizational Variables, A c c o u n t i n g R ev i e w ( 1 9 85 ) pp. 231-247.

SchaII, L. D. & Sundem, G. L., Capital Budgeting Methods and Risk: a Further Analysis, F i n a n c i a lM a n a g e m e n t (Spring 1980) pp. 7-l 1.

Schall, L. D., Sundem, G. L. & Geijsbeek, W. R., Jr, Survey and Analysis of Capital Budgeting Methods,J o u r n a l o f F i n a n c e (1978) pp. 281-287.

Seed, A. H., Improving Cost Management, M a n a g em e n t A c co u n t i n g (February 1990) pp. 27-30.ShIeifer, A. & Vishny, R. W., Management Entrenchment: the Case of Manager-Specific Investments, J o u r n a l

o f F i n a n c i a l E c o n o m i c s (1989) pp. 123-139.Strong, J, S. & Meyer, J. R., Asset Writedowns: Managerial Incentives and Security Returns, J o l o u r n u l f

F i n a n c e 1987) pp. 643-66 1.Van de Ven, A. H. & Ferry, D. L., M e a s u r i n g a n d A s ses si n g O r g a n i z a t i o n s N e w York: Wiley, 1980).Williamson, 0. E., Hierarchical Control and Optimum Firm Size, J o u r n a l o fP o l i t i c & Economy (April

1967) pp. 123-138.Wilhamson, 0. E., The Modern Corporation: Origins, Evolution, Attributes~oJournuf o f E c o n o m i c L i t e r u t u r e

(1981)~~. 1537-1568.

Gordon and Smith

Documents

Transcript of Gordon and Smith