Additional Information in Accounting Reports: Effects on Management Decisions and Subjective Performance Evaluations Under Causal Ambiguity

• Published in: Contemporary accounting research 2016-06, Vol.33 (2), p.526-550
• Main Authors: Luft, Joan, Shields, Michael D., Thomas, Tyler F.
• Format: Article
• Language: English
• Subjects: Accounting; Cognitive ability; Decision making; Information; Management; Management decisions; Organization theory; Performance evaluation
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/1911-3846.12156

Organizations have often been criticized for reliance on a single item of accounting information (e.g., profit) in evaluating performance, because of its incompleteness. We provide theory‐based experimental evidence that under frequently occurring performance‐evaluation conditions (subjective performance evaluation, causal ambiguity, and individual differences in cognitive ability, knowledge, and/or motivation that lead to different interpretations of information), reliance on a single item of accounting information (profit), rather than profit plus additional (e.g., nonfinancial or external) information, can provide two potential benefits which offset the costs of information incompleteness. First, subordinates are more likely to make the management decisions that superiors will evaluate and reward highly—that is, there are fewer coordination failures in management decisions. Second, even after controlling for the presence or absence of coordination failures, subordinates experience less negative surprise about their performance evaluations.