Target difficulty, intra-year target revisions and firm performance: evidence from business units' targets

Arnold, Markus Christopher; Artz, Martin (August 2012). Target difficulty, intra-year target revisions and firm performance: evidence from business units' targets. In: Performance: Targets, Measurement, and Evaluation. American Accounting Association

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Target difficulty is often argued to increase performance. While this association is well established in experimental research, empirical evidence in field research is rather mixed. We attempt to explain this inconsistency by analyzing the importance of intra-year target revisions, which are especially prevalent in real-world field settings. Using survey and archival data from 97 firms, we find that firms with more challenging business unit targets revise targets more often, in line with asymmetric, downward target revisions. Results further show that the degree to which targets are revised during a period results in negative effects on firm performance, as the anticipation of revision negatively affects the business unit management’s performance incentives. Additionally, we find that using targets predominantly for either decision-making or control influences the overall performance effects of target revisions. Our findings may partially explain the mixed field study evidence regarding the effects of target difficulty.

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