Determinants of Control System Design in Divisionalized Firms

Abstract

We investigate two determinants of two choices in the control system of divisionalized firms, namely decentralization and use of performance measures. The two determinants are those identified in the literature as important to control system design: (1) information asymmetries between corporate and divisional managers and (2) division interdependencies. We treat decentralization and performance measurement choices as endogenous variables and examine the interrelation among these choices using a simultaneous equation model. Using data from 78 divisions, our results indicate that decentralization is positively related to the level of information asymmetries and negatively to intrafirm interdependencies, while the use of performance measures is affected by the level of interdependencies among divisions within the firm, but not by information asymmetries. We find some evidence that decentralization choice and use of performance measures are complementary.

Assessing the Performance of Business Unit Managers

“…On theoretical grounds, we expect that any impact of information asymmetry on the weight on performance measures will be indirect via its impact on the authority of business unit managers. This expectation is consistent with the empirical findings in Abernethy et al (2004). 8 Firms were asked to identify the lowest level organizational unit that still had full production and sales tasks.…”

“…Student teams then requested that qualifying firms participate in our project and administered the questionnaire on-site. This procedure produced a high response rate: 89% of our 140 sample 5 We rely on earlier work to argue that interdependencies may be taken as a given when considering individual business units as they typically arise from joint costs and production functions or dependent demand functions (Milgrom and Roberts 1992;Abernethy et al 2004). 6 Transfer pricing is another mechanism used to deal with interdependencies among units in the firm (see, e.g., Zimmerman 2003).…”

Determinants of Organizational Design Choices in Spanish Nongovernmental Development Organizations

“…The delegation of authority involves an ex ante assignment of responsibilities based on the results. The availability of informative performance measurements better enables managers to judge the actions of their subordinates [25] and, in turn, to delegate more authority to these lower level employees [26]. Consequently, performance measurement reduces employees' potential to develop opportunistic behaviours based on their specific knowledge.…”

“…Therefore, we expect a positive relation between the level of knowledge of the employee and delegation of decision rights because the knowledge potential of the employees allows them to make decisions over a wide range of activities. We capture the specific knowledge level as the employees' education level, a well-known variable in the literature [25], [46]. We ask respondents to indicate on a Likert scale from 1 (no studies) to 5 (postgraduate) what education level their staff needs to fulfil their jobs.…”

“…Thus, we expect a positive relation between the continuity of the founder/manager of the organization and the use of incentive compensation. This variable is measured as the number of years the founder of the organization/general manager, if this position is not performed by the same person, have been running the organization, following previous studies [25].…”