The Effect of Causal Performance Measure Knowledge on Reducing Individuals' Discounting of Performance Measures in Profit Prediction

39 Pages Posted: 1 Aug 2006

See all articles by Donna Booker

Donna Booker

University of Cincinnati

Dan L. Heitger

Miami University of Ohio

Date Written: July 2006

Abstract

Prior research suggests that both financial and nonfinancial performance measures are needed for effective prediction of long-term financial performance. However, prior research shows that individuals often discount the performance measurement information provided to them when predicting future profits or evaluating performance. One reported example of performance measure discounting is the use of common measures over unique measures. It is unclear from prior research what level of performance measure knowledge is required to affect individuals' discounting of performance measures. We examine how differences in the level of individuals' causal knowledge (i.e., strong, weak, none) regarding the relationship between the performance measure and net income affect their usage (and discounting) of the performance measure in a profit prediction task. As expected, for nonfinancial measures, the results show that individuals perceive greater predictive value in, and are more likely to use, performance measures for which they possess weak causal knowledge (i.e., directional association of performance measure relationship) as compared to measures for which they possess no causal knowledge. Contrary to expectations, the results show no difference in individuals' perceptions, or expected usage, of performance measures for which they possess strong causal knowledge (i.e., complete story underlying performance measure relationship) as compared to only weak causal knowledge. These findings suggest that a lack of causal knowledge regarding performance measures leads individuals to discount such measures but that discounting can be mitigated by providing individuals with relatively simple, inexpensive weak causal performance measure knowledge, such as basic statistical correlation information. The findings have implications for the level of knowledge that organizations should provide, along with the performance measures themselves, in order to reduce the likelihood that individuals unnecessarily discount otherwise predictive performance measures.

Keywords: Financial and nonfinancial performance measures, weak versus strong causal knowledge, predicting long-term financial performance, accounting knowledge

Suggested Citation

Booker, Donna and Heitger, Dan L., The Effect of Causal Performance Measure Knowledge on Reducing Individuals' Discounting of Performance Measures in Profit Prediction (July 2006). AAA 2007 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=918870 or http://dx.doi.org/10.2139/ssrn.918870

Donna Booker

University of Cincinnati ( email )

Cincinnati, OH 45221-0389
United States

Dan L. Heitger (Contact Author)

Miami University of Ohio ( email )

Oxford, OH 45056
United States

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