Interim Performance Measures and Private Information

53 Pages Posted: 15 Aug 2011 Last revised: 3 Jul 2014

See all articles by Christian Hofmann

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Naomi Rothenberg

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: December 28, 2012

Abstract

This study investigates whether having an upstream or downstream agent privately observe an interim performance measure and disseminating this measure to the other agent is valuable to the principal. The signal is informative about the upstream agent’s action and positively correlated with output. If the upstream agent privately observes the signal, there can be a higher cost of the downstream agent if the signal is sufficiently forward-looking. If the downstream agent privately observes the signal, the tradeoff involves rents to the downstream agent versus a reduced cost for the upstream agent. Private observation of an interim signal is valuable to the principal if it is not too forward-looking. The choice between upstream and downstream agent depends non-trivially on the signal’s backward-looking quality. The results suggest that the value of observation and dissemination of an interim signal depends on the informativeness of output and the signal about upstream and downstream production.

Keywords: principal-agent theory, asymmetric information, interim performance measures, balanced scorecard

JEL Classification: D82, D83, L20, M41

Suggested Citation

Hofmann, Christian and Rothenberg, Naomi, Interim Performance Measures and Private Information (December 28, 2012). Accounting Review, September 2013, Vol. 88, No. 5, pp. 1683-1714., Available at SSRN: https://ssrn.com/abstract=1909321 or http://dx.doi.org/10.2139/ssrn.1909321

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Naomi Rothenberg (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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