Corporate Financial Control Mechanisms and Firm Performance: The Case of Value-Based Management Systems

43 Pages Posted: 18 Sep 2006

See all articles by Harley E. Ryan

Harley E. Ryan

Georgia State University - Department of Finance

Emery A. Trahan

Northeastern University, Finance Group

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Abstract

We examine the performance of 84 firms that adopt value-based management (VBM) systems during the period 1984-1997. The typical firm significantly improves matched-firm-adjusted residual income after adopting VBM. This improvement persists for the five post-adoption years studied. After controlling for possible sample bias, we find that large firms show less improvement than small firms. We find a negative relation between tying compensation to VBM and post-adoption performance. We also find that firms reduce capital expenditures following VBM adoption, but that the reductions in spending do not differ based on the firms' growth opportunities. Overall, the evidence suggests that VBM improves economic performance and the efficient use of capital.

Keywords: Value-based management; Residual income, Management compensation, Corporate governance

JEL Classification: M40, M46, J33, G34

Suggested Citation

Ryan, Harley E. and Trahan, Emery A., Corporate Financial Control Mechanisms and Firm Performance: The Case of Value-Based Management Systems. Journal of Business Finance and Accounting, Forthcoming . Available at SSRN: https://ssrn.com/abstract=930637

Harley E. Ryan (Contact Author)

Georgia State University - Department of Finance ( email )

University Plaza
35 Broad Street, Suite 1221
Atlanta, GA 30303-3083
United States
404-651-2674 (Phone)
404-651-2630 (Fax)

Emery A. Trahan

Northeastern University, Finance Group ( email )

Boston, MA 02115
United States

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