Hypotheses - Effects of performance monitoring systems on performance and other incentive mechanisms in corporate governance

Table: Hypotheses - Effects of performance monitoring systems on performance and other incentive mechanisms in corporate governance

Click here to see an exhibition on these issues and their relation to other hypotheses in corporate governance.

1) From performance monitoring system to financial performance

1A: Cost argument: Monitoring is expensive so ceteris paribus more performance monitoring decreases financial performance (Jensen and Meckling [1976, page 308]).

1B: Decision making argument: More performance monitoring means better performance because ceteris paribus it improves the allocation of corporate resources, i.e., profitable projects are extended and unprofitable projects are either terminated or changed to become profitable.

11) From performance monitoring system to decision system

11A: Better performance monitoring systems could improve the control systems.

24) From performance monitoring system to market for corporate control

24A: The market for corporate control may function better with a better performance monitoring system. For instance, it may be easier for potential buyers to assess whether it pays to buy another company or not.

28) From performance monitoring system to market for management services

28A: Better performance monitoring systems may improve the functioning of the market for management services. For instance, it may be discovered sooner rather than later that the management is doing a poor job and need to be replaced.

16) From performance monitoring system to incentive based compensation

16A: Better performance monitoring systems could improve the effect of the remuneration systems. For instance, with accurate performance measurement the implied reward and punishment of the remuneration systems will be less arbitrary.

22) From performance monitoring system to bankruptcy system

22A: A better performance monitoring system should also make it easier to reorganize or liquidate a bankrupt firm.