Capital expenditure decision making in divisionalised companies: a study of the role of managerial performance measures and other contextual influences

© 1999 Anne Maree LillisThe accounting literature in the area of divisional performance measurement reflects a significant rift between theory and practice. Theoretical debate has tended to focus on dysfunctional decisions, particularly in the area of capital investment, that may be made by divisional managers seeking to maximise their divisional ROI result. The empirical evidence, however, still indicates the widespread use of ROI and other theoretically questionable performance measures in practice. This research is an attempt to shed light on the rift between theory and practice by studying the capital expenditure decision process intensively in three divisionalised companies. More specifically, an attempt is made to explore the use of accounting measures of managerial performance, the incidence of dysfunctional decision making factors that may mitigate the importance of accounting measurement of managerial performance as decision making. The development of a conceptual framework for the study is greatly influenced by the need to study the role of accounting within its organisational context (Hopwood, 1983; Kaplan, 1984). The conceptual framework has two key elements:1.The distribution of capital expenditure decision making authority within the divisionalised companies, and2. The general nature of organisational control systems. The distribution of authority is conceptually based on the distribution of knowledge and influence, rather than formal authority structures. The conceptualisation of organisational control is broad, and includes both formal and informal influences on managerial behaviour. The findings reflect a distribution of authority which is knowledge-based in relation to initiation and screening elements of the decision process. The findings also provide an insight into the influences on divisional management capital expenditure decisions. In particular they illustrate the role of managerial service histories, corporate familiarity with divisional operations, strategic planning and multiple performance measures within the organisational control system. The development of this understanding has potential to enable us to move beyond the simplified organisational contexts within which we teach and the control of divisionalised operations (Kaplan, 1986). The findings also provide a stimulus to further research – either hypothesis testing in contingency research, or further exploration through intensive field studies