The Effect of Management Control Elements on Coordination

40 Pages Posted: 17 Aug 2013 Last revised: 1 Feb 2014

See all articles by Sara Bormann

Sara Bormann

Washington University in St. Louis - John M. Olin Business School

Jan Bouwens

Amsterdam Business School

Christian Hofmann

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Date Written: January 2014

Abstract

This study examines how control elements of a firm affect managerial decision making. The firm operates a network of 59 profit centers. It uses a transfer-pricing system designed to deal with externalities individual profit centers can impose on other profit centers. Further, profit center managers are incentivized with own-level residual income measures. The use of the latter measure would lead managers to make decisions benefiting their performance irrespective of whether these decisions negatively affect other profit centers. However, the firm implemented a third system that would potentially lead managers to benefit other profit centers. The firm established regional clusters of profit centers that meet at least once every quarter. The creation of these clusters creates proximity as profit centers perform complementary activities, making it more beneficial for them to coordinate. Our findings suggest that self-centered choices by profit centers are mitigated as proximity within a cluster increases. Additionally, we find evidence that proximity is positively associated with coordination and overall performance.

Keywords: Specialization, Intra-Firm Coordination, Proximity, Complementarities, Contracting, Business Unit Performance Measurement, Organizational Design

JEL Classification: M40, M12, D23, L21

Suggested Citation

Bormann, Sara and Bouwens, Jan and Hofmann, Christian, The Effect of Management Control Elements on Coordination (January 2014). AAA 2014 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2309471 or http://dx.doi.org/10.2139/ssrn.2309471

Sara Bormann (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Jan Bouwens

Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 5258740 (Phone)

Christian Hofmann

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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