Measuring Productivity Makes Companies More Productive

Companies in the 90th percentile of productivity produce twice as much as those in the 10th percentile using the same inputs. Why?

Economists struggle to explain it. Econ 101 says that we shouldn’t see that gap because competition forces all companies toward the middle: Good firms lose their advantage through competition, and bad ones get flushed out of the system. Yet this distribution difference persists.

As accounting researchers, we think about the role of measurement. Some managers do a better job of hiring and firing, or of controlling their inventory, and so on. This is where accountants matter, both because they produce the data that measure productivity and because they help managers make better decisions, which leads to better productivity.

Accounting is typically thought of as the act of passively collecting information, but doesn’t measuring things change people’s behavior?

Yes. We often think of accounting as a passive activity, but accountants constantly study how reporting information changes behavior. They are the referees on the playing field; they don’t actually play. However, as I saw in my previous life in corporate finance, producing better information can improve strategic decision-making.

Are good managers not effective unless they have accurate financial information?

They’re less effective than good managers with better data. Our research finds that companies with audited financial statements are more productive, even after accounting for the quality of their managers.

One channel my coauthors and I explored is, if you get audited financial statements, will it improve your productivity? In an audit, an outside accountant checks that a manager’s financial statements are materially in accordance with generally accepted accounting principles, but a lot goes into that. For example, auditors do “tests of controls” to evaluate the processes that were used to generate the statements. They might verify the inventory and equipment accounted for on the balance sheet. 

When I was an auditor, I walked the factory floor, counting inventory, seeing how the machines were working. Good certified public accountants help both generate better information and identify potential issues. That better information in turn helps managers reallocate people and resources. 

If audited financial statements help companies become more productive, why don’t all companies get them?

CPAs lead companies to report their financial results more accurately, but there are costs. Not only do auditors charge for their services, but audits require a lot of managerial time. There’s a trade-off, and some firms may focus on the costs without understanding the less-salient potential benefits. Also, private firms may want to understate profits to reduce their tax burden. Presumably, an auditor would clean that up and force them to report all their productivity fully.

Michael Minnis is Deputy Dean for Faculty and Fuji Bank and Heller Professor of Accounting at Chicago Booth.