Value-based management control systems and the dynamics of working capital: Empirical evidence

We examine the relationship between the use of value-based key performance indicators in a firm’s management control system and the dynamics of working capital (WC). We hypothesize that firms with value-based management control systems (VBMCS) manage WC more cautiously, in particular regarding excessive WC. Theoretically, we link this to the argument that value-based performance measures explicitly account for the economic costs of WC by considering the opportunity cost of capital. We empirically confirm our hypothesis by analyzing an extensive hand-collected data set of listed non-financial German firms between 2002 and 2014. We document that firms with VBMCS operate at lower levels of WC and, while seemingly less willing to settle deficient WC, reduce excessive WC more quickly. The latter does not seem to produce overinvestment activities, suggesting that VBMCS are particularly valuable in firms operating in high WC environments. Consistent with this notion, we find that firms operating in high-WC industries benefit more from the adoption of a VBMCS when we examine the link between firm value and the adoption of a VBMCS. Our study adds to the understanding of the influence of performance measurement within a firm’s management control system on firm behavior.