The Influence of Target Setting on Employees’ Investment Behavior

37 Pages Posted: 21 Aug 2013 Last revised: 5 Sep 2017

See all articles by Alexander Brueggen

Alexander Brueggen

Maastricht University

Christoph Feichter

Maastricht University

Frank Moers

Maastricht University School of Business and Economics; European Centre for Corporate Engagement (ECCE)

Date Written: May 2017

Abstract

In this study we examine whether increasing targets based on past performance information or on exogenous information affects employees’ trade-off between short-term output and long-term investments differently. Both mechanism are supposed to increase long-term investments, while also achieving the short-term output targets. Archival data do not allow disentangling these mechanisms, so we examine this question in a multi-period experiment in which participants can spend their time on either maximizing short-term output or investing in long-term productivity improvements. The results show little difference in the initial investment levels. However, as the time horizon decreases, participants in the exogenously increasing target condition start reducing their investments and focus on short-term output, while participants in the target ratcheting condition keep their initial high-level of investment. This outcome is consistent with our theory that target ratcheting decreases the horizon problem of individuals and thereby leads to higher long-term investments. This study helps to reconcile seemingly disparate findings of prior literature and provides a plausible explanation for the widespread use of an alleged dysfunctional practice, that is, target ratcheting.

Keywords: Target Setting, Long-Term Investments, Target Ratcheting

Suggested Citation

Brueggen, Alexander and Feichter, Christoph and Moers, Frank, The Influence of Target Setting on Employees’ Investment Behavior (May 2017). AAA 2014 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2312799 or http://dx.doi.org/10.2139/ssrn.2312799

Alexander Brueggen

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Christoph Feichter (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Frank Moers

Maastricht University School of Business and Economics ( email )

Maastricht

HOME PAGE: http://www.maastrichtuniversity.nl/sbe

European Centre for Corporate Engagement (ECCE) ( email )

Tongersestraat 53
Maastricht, 6211LM
Netherlands

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