2001 Volume 9 Issue 2 Pages 3-13
Both the “profit before allocating head-office or corporate cost” and the “profit after allocating head-office or corporate cost” are used to evaluate a divisional manager’s performance. From the existing literature, it is found that the “profit before allocating head-office or corporate cost” is used to evaluate a divisional manager’s performance. However, in the actual practice of Japanese companies it is seen in the majority of cases that divisional managers are evaluated by the “profit after allocating corporate cost.” This paper examines the relationship between profit evaluation measures for the divisional manager and the efficiency of capital, and clarifies why such practice is undertaken in Japan. The author has conducted a questionnaire survey of all listed companies in the first section of the Tokyo stock exchange in October 1997, and analyzed the resulting data with a log-linear model. The results suggest that using the “profit after allocating corporate cost” for evaluating divisional managers is effective in improving financial performance (i.e. turnover of total capital and ROI improve).
