[Accounting numbers are frequently used in evaluating management performance, and performance evaluation is an important ingredient in motivating managers. Three significant factors generally create difficulties in developing performance measures for a given manager. First, the actions and strategies implemented by the manager are not observable directly, so the manager cannot be compensated directly for his input into the firm. Second, the full consequences of the manager's actions are not observable, in large part because the impact of those actions extend beyond his subunit of the firm and beyond his time as manager of that subunit. Third, uncontrollable events influence the consequences that are observed. The agency theory literature has explored extensively the implications of the nonobservability of the manager's actions and the fact that performance measures are influenced by unobservable, uncontrollable events. However, this literature has given only limited attention to the fact that performance measures frequently are incomplete or imperfect representations of the economic consequences of the manager's actions.1 On the other hand, discussions of performance evaluation in management accounting texts often raise issues regarding the incompleteness and imperfectness of the accounting numbers that are used as performance measures. For example, divisional accounting profit is described as a short-term financial measure that may induce managers to ignore the future economic consequences of their current actions.2 More generally, management accounting texts discuss various problems that arise in inducing managers to have goals that are congruent with those of the firm's owners.3 These discussions typically follow one of two tacks. First, most texts discuss alternative methods for measuring various accounting numbers. For example, discussions of divisional profit measures often consider direct costing versus absorption costing, the elimination of allocated fixed costs, market versus cost based transfer prices, and the inclusion of interest charges for assets used. The objective here is to create a single measure that is as congruent with the firm's objectives as possible. Second, some texts discuss the use of additional, often nonfinancial, performance measures. Kaplan and Atkinson (1989, 536) refer to General Electric and McDonald's as leaders in the use of such measures, and Anthony et al. (1992, 651) provide the following summary of their measures. McDonald's evaluated its store managers on product quality, service, cleanliness, sales volume, personnel training, and cost control. When General Electric decentralized in the 1950s, it identified multiple measures of divisional performance: profitability, market position, productivity, product leadership, personnel development, employee attitudes, and public responsibility. This paper uses an agency theory model to explore the economic impact of variations in performance measure congruence and the use of multiple performance measures to deal with both problems of goal congruence and the impact of uncontrollable events on performance measures. To address the congruency issues, we use a multidimensional representation of the manager's actions. Most of the agency theory literature has examined models in which the manager's action space is either single dimensional or finite. Our approach is similar to the multi-task model examined by Holmstrom and Milgrom [HM] (1991). Our analysis differs from theirs in that we focus on performance measure issues and consider measures that may be influenced by more than one element of the manager's action. The key characteristics of a single performance measure are its congruence with the principal's expected gross payoff and its noisiness (due to uncontrollable events). The first-best result is achieved if, and only if, the performance measure is perfectly congruent and noiseless. A contract based on a noncongruent measure induces suboptimal effort allocation across tasks, whereas performance measure noise results in suboptimal effort intensity. We characterize the value of providing additional performance measures, and illustrate the use of additional measures to reduce risk and noncongruity (due to myopia and window dressing). The value of an additional measure is zero if, and only if, the existing measures constitute a sufficient statistic for the additional measure with respect to the manager's action. The terminal value of the firm is not contractible information if it is realized subsequent to the contract termination date. However, the market price (at the contract termination date) of a publicly traded firm is contractible information. The analysis demonstrates that while price efficiently aggregates investor information for valuation purposes, it is not likely to be an efficient aggregation for incentive purposes. Hence, there is a loss of efficiency if the price is used as the sole performance measure. Of course, it can be a valuable performance measure if it contains otherwise noncontractible information.]

Abstract Reviews the book "The Theory of Financial Markets and Information," by James A. Ohlson.

Abstract This article explores conventional questions of why and how budgets should be employed for motivation purposes in an economic setting. The authors focus on the types of employment contracts that are associated with equilibrium allocations in the labor market. Market incompleteness is a necessary condition for use of budgets in the employment contract. Beyond this, issues of controllability, management by exception, and tightness of standards are observed to depend on the contracting environment faced by the individual agents.

Abstract The article discusses forecast evaluation in accounting. Accounting data are often used in the development of forecasts and accountants are often called on to make forecasts. Development of a variable overhead rate per direct labor hour may, for example, be viewed as development of a forecast--whether it is used in a standard cost system, in a budget, or in a product mix decision. Similarly, establishment of a depreciation policy requires a forecast of service life. Furthermore, the ability to forecast some specific outcome has been offered as a criterion for selection among accounting alternatives. But, whatever its ultimate purpose, development of a forecast constitutes a decision--a conscious choice among alternatives. The concern in this paper is limited to this decision aspect of forecasting. In particular, in the first section it is demonstrated that selection among forecast alternatives is a subset of the accountant's general problem of selection among information alternatives. Following this, characterization is done of prevailing methods of selecting among forecast alternatives as a simplification of the basic information choice problem. The paper then concludes with two illustrative simulations.

Abstract The article discusses the nature of decision models and information evaluation models. The first section presents a general framework, or model, for information evaluation. The second examines the nature of the operational model that would be constructed in order to apply the general framework in a specific setting. The information evaluation process is viewed in cost-benefit terms; and the cost-benefit, or value, calculation is developed from the point of view of an individual who decides what information to supply. Different signals may result in different decisions, and, therefore, the information evaluator must develop a conditional probability distribution over the future events for each possible signal. Decision models seldom represent as controllable variables all actions that must be taken. Most mathematical models do not attempt to include detailed predictions of individual events. One simplified and well-known method for selecting information systems is to base the selection on personal opinion. Some insights that can be developed by such an exploration were then related to information choice issues and information research methods.

This paper provides a model in which audited reports are valuable to entrepreneurs who have private information and seek to share risks with investors. A distinctive feature of the model is that the choice of auditor and the resulting audited report provide partial information about the entrepreneur's private information, and he resolves all remaining investor uncertainty by signalling with retained ownership. The value of an audit is increasing in audit quality and the firm-specific risk faced by the entrepreneur and is a nondecreasing function of the entrepreneur's expectations about the future value of the firm.

Abstract. This study considers the welfare effects of line‐of‐business (LOB) reporting by firms operating in imperfectly competitive markets. The analysis is based on a two‐period model in which a multisegment firm, labeled the incumbent, operates as a monopolist in two markets in the first period and then competes against an entrant in each of the two markets in the second period. The incumbent obtains private information in the first period. LOB reporting fully reveals that information to the entrants; aggregate reporting only partially reveals the incumbent's information. The second‐period consequences on firms and consumers parallel results previously available from the information‐sharing literature. These results serve to explain why some firms opposed the imposition of LOB reporting by accounting rule‐making bodies. The incumbent may distort first‐period production in an attempt to influence entrant beliefs. However, such distortions lower the incumbent's expected first‐period profit and result in no gains in the second period. Nonetheless, in equilibrium, these distortions cannot be avoided unless the entrants observe the incumbent's first‐period production or prices, suggesting a role for nonfinancial disclosures in accounting reports. Résumé. Les auteurs se penchent sur l'effet «protecteur» de la communication d'informations relatives au secteur d'activité par les entreprises qui exercent leurs activités sur des marchés imparfaitement concurrentiels. L'analyse est fondée sur un modèle comportant deux périodes, dans lequel une entreprise oeuvrant dans plusieurs secteurs d'activité‐désignée sous l'appellation d'entreprise installée—exerce un monopole dans deux marchés au cours de la première période et doit ensuite livrer concurrence à un nouveau venu dans chacun des deux marchés au cours de la seconde période. L'entreprise installée obtient de l'information privilégiée au cours de la première période. L'information sectorielle livre intégralement cette information aux nouveaux venus, mais l'information consolidée ne révèle qu'une partie de l'information dont dispose l'entreprise installée. Les résultats de la seconde période pour les entreprises et les consommateurs s'apparentent à ceux qui ont été exposés jusqu'à maintenant dans les écrits relatifs au partage d'informations. Ces résultats viennent expliquer pourquoi certaines entreprises se sont opposées à ce que les organismes de réglementation comptable fassent de la présentation de l'information sectorielle une obligation. L'entreprise installée peut «biaiser» l'information relative à la première période dans l'intention d'influer sur les convictions des nouveaux venus. Ces distorsions diminueront cependant le profit espéré par l'entreprise installée au cours de la première période et se traduiront par des gains nuls au cours de la seconde période. Néanmoins, en situation d'équilibre, ces distorsions ne peuvent être évitées, à moins que les nouveaux venus n'observent la production ou les prix de l'entreprise installée au cours de la première période, ce qui permet de croire que la présentation d'informations non financières dans les rapports comptables a un rôle à jouer.