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 the impact 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 which the 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; firm performance.

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 single