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Do You Get What You Pay For? An Experimental Analysis of Managers' Decisions and Owners' Expectations
Markus C. Arnold, University of Göttingen
Robert M. Gillenkirch, University of Göttingen
Susanne A. Welker, University of Göttingen
ABSTRACT. `You get what you pay for' is a fundamental principle of management accounting. We analyze this principle in an experiment in which `managers' make one-period investment decisions and `owners' predict these decisions. Three alternative performance measures are considered: earnings, ROI, and residual income. We find that, although managers overinvest (underinvest) on average when they are evaluated at earnings (ROI), owners do not get what they pay for from the majority of managers when using earnings or ROI as performance measures. Without information about managers' decisions, owners overestimate these performance measures' effectiveness in inducing individually rational behavior. When confronted with managers' decisions in early rounds, owners consistently revise their beliefs, but their overall estimation quality remains relatively low.
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