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- W2043670084 abstract "Existing literature documents a positive stock market reaction to the announcement of long-term performance plans as well as subsequently higher growth rates in earnings per share and return on equity (ROE). These findings are consistent with the notion that such performance plans provide an incentive to managers to reduce the magnitude of agency conflict present within the modern corporation. Using a paired sample design, this paper addresses the specific sources of superior post-adoption ROE performance. We fail to observe any evidence of improvement in total sales, total asset turnover or the management of long-term debt. We find that the post-adoption increase in ROE growth is primarily attributable to improved profit margins, which in turn is a result of a lower Cost Of Goods Sold (COGS) and reduced inventory related costs. Specifically, we observe lower inventory size and a greater inventory turnover in the post-adoption period. We further report a reduction in short-term debt usage, which is consistent with lower inventory related costs. We also find that the number of employees declines in the post adoption period, which is consistent with a lower COGS. We find no evidence, however, that managers significantly reduce depreciation, advertising or R&D expenses. Moreover, it does not appear that managers attempt to manipulate reported earnings by increasing accruals. The obvious implication of this study is that through the adoption of long term performance plans, shareholders can mitigate the agency problem by inducing management to reduce wasteful expenditures on excessively large workforces and inventories. These results suggest that a prominent manifestation of agency conflict within the firm is lack of managerial oversight over the size of the corporate workforce and inventories." @default.
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- W2043670084 date "1998-03-01" @default.
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- W2043670084 title "An agency analysis of the effect of long-term performance plans on managerial decision making" @default.
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- W2043670084 doi "https://doi.org/10.1016/s1062-9769(99)80105-7" @default.
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