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Fishing for excuses and performance evaluation

Author

Listed:
  • Francois Larmande

    (EMLYON Business School)

  • Jean Pierre Ponssard

    (CNRS and Ecole polytechnique)

Abstract

We study a principal–agent model in which the agent can provide ex post additional relevant information regarding his performance. In particular, he can provide a legitimate excuse, that is, evidence that a poor result is only due to factors outside his control. However, building a convincing case requires time, time that is not spent on exerting productive effort and thus generating information represents an opportunity cost. We obtain necessary and sufficient conditions for the principal to prefer a policy of adjusting ex post the performance measure for the information provided by the agent to a policy of conforming to a result-based system with no adjustments. The risk aversion and a possible limited liability of the agent play an important role in the analysis. This paper clarifies the issues associated with the so-called “excuse culture” prevailing in some organizations.

Suggested Citation

  • Francois Larmande & Jean Pierre Ponssard, 2014. "Fishing for excuses and performance evaluation," Review of Accounting Studies, Springer, vol. 19(2), pages 988-1008, June.
    • Handle: RePEc:spr:reaccs:v:19:y:2014:i:2:d:10.1007_s11142-013-9268-1
    DOI: 10.1007/s11142-013-9268-1
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    References listed on IDEAS

    as
    1. François Larmande, 2013. "Limited liability, the first-order approach, and the ranking of information systems in agencies," Post-Print hal-02312972, HAL.
    2. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    3. Joel S. Demski & Hans Frimor & David E. M. Sappington, 2004. "Efficient Manipulation in a Repeated Setting," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 42(1), pages 31-49, March.
    4. Joel S. Demski, 1998. "Performance Measure Manipulation," Contemporary Accounting Research, John Wiley & Sons, vol. 15(3), pages 261-285, September.
    5. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
    6. Sunil Dutta & Frank Gigler, 2002. "The Effect of Earnings Forecasts on Earnings Management," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(3), pages 631-655, June.
    7. Anil Arya & Jonathan Glover, 2008. "Performance measurement manipulation: cherry-picking what to correct," Review of Accounting Studies, Springer, vol. 13(1), pages 119-139, March.
    8. Larmande, Francois, 2013. "Limited liability, the first-order approach, and the ranking of information systems in agencies," Economics Letters, Elsevier, vol. 118(2), pages 314-317.
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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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