Testing for Distortions in Performance Measures: An Application to Residual Income Based Measures like Economic Value Added

Randolph Sloof and Mirjam Praag

No 14-056/V, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper resulted in a publication in the 'Journal of Economics and Management Strategy' , 2015, 24(1), 74-91.

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.

Submitted to the 'Journal of Economics and Management Strategy'.

Keywords: Residual Income; Economic Value Added; distortion; performance measurement; incentive compensation (search for similar items in EconPapers)
JEL-codes: D21 G35 J33 L21 M12 M40 M52 (search for similar items in EconPapers)
Date: 2014-05-09
New Economics Papers: this item is included in nep-cfn, nep-eff and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Testing for Distortions in Performance Measures: An Application to Residual Income‐Based Measures like Economic Value Added (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20140056

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