Determinants of Control System Design in Divisionalized Firms

Abstract

We investigate two determinants of two choices in the control system of divisionalized firms, namely decentralization and use of performance measures. The two determinants are those identified in the literature as important to control system design: (1) information asymmetries between corporate and divisional managers and (2) division interdependencies. We treat decentralization and performance measurement choices as endogenous variables and examine the inter-relation among these choices using a simultaneous equation model. Using data from 78 divisions our results indicate that decentralization is positively related to the level of information asymmetries and negatively to intra-firm interdependencies, while the use of performance measures is affected by the level of interdependencies among divisions within the firm, but not by information asymmetries. We find some evidence that decentralization choice and use of performance measures are complementary.

Keywords: Organization design, control system, interdependencies, information asymmetry, performance measures

JEL Classification: D23, D82, L22, M12, M40, M46, G34