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Accounting Notes Management Accounting, Budgets and Behaviour Notes

Topic 5 Reading An Exploratory Study Of Relative And Incremental Information Content Of Two Non Notes

Updated Topic 5 Reading An Exploratory Study Of Relative And Incremental Information Content Of Two Non Notes

Management Accounting, Budgets and Behaviour Notes

Management Accounting, Budgets and Behaviour

Approximately 56 pages

AC310: Management Accounting, Financial Management and Organizational Control - Module 3 (Management Accounting, Budgets and Behaviour).

These notes cover the third module of the AC310 Management Accounting course at LSE which covers the following topics: Budgeting issues, the no-budgeting option, contingency theory, organisational participation, understanding how budgets impact people, and how people impact operations and capital budgets in organisations, through the lens of different organisat...

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Introduction

  • Tests the relative and incremental information content of two non-financial performance measures compared to financial performance measures for future financial performance

  • The accounting literature is ambiguous about whether non-financial measures have relative or incremental information content, or both, beyond lagged financial measures for future financial performance

  • Absence frequency and on-time delivery do not have more relative information content than lagged financial measures

    • But both have incremental information content beyond the lagged financial measures for both future costs and future revenues

  • Kaplan and Norton (1992) argue that contemporaneous non-financial measures are better indicators for future financial performance measures than contemporaneous financial measures

    • Banker, Potter and Srinivasan (2000):

      • “…current non-financial measures are better predictors of long-term financial performance than current financial measures”

    • Nagar and Rajan (2001):

      • “non-financial measures provide a better indication of quality related customer goodwill losses”

  • Non-financial measures, pay more attention to causes rather than effects (Singleton-Green, 1993)

    • They also have a long-term orientation (Kaplan and Norton, 1992)

  • Non-financial measures contain more information than financial measures (Biddle, Seow and Siegel, 1995)

  • To be useful, non-financial performance measures should have incremental information content (Biddle et al., 1995)

    • i.e. Provide information beyond the lagged financial measures

  • Information content of performance measures is an important aspect that determines the weight of performance measures in the evaluation and reward system

  • Ittner, Larcker and Randall (2003) find that firms that use a BSC are more satisfied about their performance measurement system, but that their economic performance is not higher than non-users

  • Wiersma’s study is on the Dutch Royal mail company

  • Evaluating managers on work satisfaction and quality is congruent with the oft-cited critical components for a successful quality-oriented strategy (Ittner and Larcker, 1995)

Information Content of Non-financial Measures

Relative Information Content

  • Relative information content assesses whether one measure contains more information than another

    • Stronger assumption than incremental information

    • Two measures can have incremental information content beyond each other, but only one measure can have more information content

  • Relative information content can be considered as a comparison of the congruity of different measures

  • Human resource literature argues that worker satisfaction is correlated stronger with absence frequency than with an overall absenteeism measure

  • Absence frequency taps voluntary absenteeism of employees, which is related to work attitudes

Incremental Information Content

  • Incremental information content assesses whether information is helpful to make better predictions beyond an existing piece of information (Biddle et al., 1995)

  • Ittner, Larcker and Rajan (1997)’s interpretation of Holmstrom’...

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