Testing for Distortions in Performance Measures: An Application to Residual Income Based Measures Like EVA

Journal of Economics and Management Strategy, Forthcoming

Tinbergen Institute Discussion Paper No. TI 2014-056/V

29 Pages Posted: 9 Nov 2014

See all articles by Randolph Sloof

Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB); Tinbergen Institute

Mirjam van Praag

University of Amsterdam - Department of Economics; Copenhagen Business School; Tinbergen Institute; IZA Institute of Labor Economics

Date Written: 2014

Abstract

Distorted performance measures in compensation contracts elicit suboptimal behavioral responses that may even prove to be dysfunctional (gaming). This paper applies the empirical test developed by Courty and Marschke (2008) to detect whether the widely used class of Residual Income based performance measures — such as Economic Value Added (EVA) — is distorted, leading to unintended agent behavior. The paper uses a difference-in-differences approach to account for changes in economic circumstances and the self-selection of firms using EVA. Our findings indicate that EVA is a distorted performance measure that elicits the gaming response.

Keywords: Residual Income, Economic Value Added, Distortion, Performance Measurement

JEL Classification: D21, G35, J33, L21, M12, M40, M52

Suggested Citation

Sloof, Randolph and van Praag, Mirjam and van Praag, Mirjam, Testing for Distortions in Performance Measures: An Application to Residual Income Based Measures Like EVA (2014). Journal of Economics and Management Strategy, Forthcoming, Tinbergen Institute Discussion Paper No. TI 2014-056/V, Available at SSRN: https://ssrn.com/abstract=2520522

Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 5241 (Phone)
+31 20 525 4310 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Mirjam Van Praag (Contact Author)

Copenhagen Business School ( email )

Kilevej 14A
Frederiksberg, 2000
Denmark

University of Amsterdam - Department of Economics ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4096 (Phone)
+31 20 525 4182 (Fax)

Tinbergen Institute

Gustav Mahlerlaan
Amsterdam
Netherlands

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
90
Abstract Views
953
Rank
516,898
PlumX Metrics