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JMAR Volume Thirteen 2001

The Impact of Activity-Based Costing Techniques on Firm Performance
Tom Kennedy University of Limerick John Affleck-Graves University of Notre Dame
Abstract: Given the debate in both the professional and scholarly literature on the effectiveness of management accounting systems in the contemporary business environment, there is a need to understand more about theimpact of activity-based costing (ABC). In this paper, we show ttiat the choice of a management accounting system, such as ABC, may have a significant impact on firm value. Specifically, for a sample of U.K. firms, we show that firms adopting activity-based costing techniques outperform matched non-ABC firms by approximately 27 percent over the three years beginning on January 1 of the year in whichthe ABC techniques are first implemented. This result is robust to different matching criteria and for both accounting and market-based measures of performance. Further analysis suggests that ABC adds to firm value through better cost controls and asset utilization, coupled with greater use of financial leverage.

Keywords: activity-based costing; abnormal returns; holding period returns; firmperformance.

INTRODUCTION
The availability and relevance of accounting information underlies many business decisions. In recent years, traditional volume-based cost models have been the subject of much criticism, especially in relation to the accuracy of product costing. The popularity of activity-based costing (ABC) in the mid-1980s and the subsequent evolution {Bromwich and Bhimani 1989) vs.revolution (Johnson and Kaplan 1987) debate has enriched both the management accounting literature and practice. Research to date, however, has concentrated on assessing the integrity of the ABC process (for example, Foster and Gupta 1990; Noreen 1991; Roth and Borthick 1991; Banker and Johnston 1993; McGowan 1998; Maher and Marais 1998); examining its application and implementation in a singlecase study situation (for example, Cooper and Kaplan 1999); assessing the degree of interest and adoption (for example, NichoUs 1992; Armitage and Nicholson 1993; Innes and Mitchell 1995, 1997; Malmi 1999); and factors impacting the success of implementation (for example, Anderson 1995; Shields 1995; Foster and Swenson 1997;

This paper has benefited from the helpful comments of Roger Mills,Robert Kaplan, Ram Ramanan, Eamonn Walsh, and seminar participants at Florida State University, the University of Kentucky, and the University of Notre Dame. We gratefully acknowledge comments from two anonymous remewers and the editor in revising this paper. Any remaining errors are the sole responsibility of the authors. The financial support of the University of Limerick is also acknowledged. 20

Joumal of Management Accounting Research, 2001

Anderson and Young 1999). Despite the assertion of Cooper and ICaplan (1992) that "the goal of ABC is to increase profits, not to obtain more accurate costs," little attempt has been made to examine empirically the relationship between the adoption of ABC and the creation of shareholder value through increased profits. Therefore, the primepurpose of this paper is to see whether the many documented successfiol case study implementations of ABC are, on average, translated into superior stock perform,ance. Using mail surveys, we identify a sample of 47 firms listed on the London Stock Exchange (LSE) that adopted ABC between January 1988 and February 1996. We also identify 183 firms that had not adopted ABC before the end of February1996. We match each adopting firm at the beginning of the year in which they first adopted ABC with a non-adopting firm from the same industry and of approximately the same market capitalization. Despite the limited number of confirmed non-adopters in our sample, we were able to match 37 of the 47 ABCadopting firms within a reasonable level of accuracy. Next we computed buy-andhold returns for the...
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