Abstract

This study examines various determinants of incentive intensity and the moderating effect of risk aversion on the relationship between incentive intensity and organisational performance. Prior studies have reported mixed results concerning the determinants of incentive intensity, and few studies have examined the moderation effect. We analysed empirical data from a cross-sectional survey of 600 Japanese organisations that manage foreign subsidiaries. The principal and agency structure can be seen in both participants (HQ and a foreign subsidiary) with the agency problem. The first determinant is environmental uncertainty, which is investigated in two types of uncertainties: market and general business environmental uncertainties. The findings suggest that general business environmental uncertainty is negatively associated with incentive intensity, but the negative effect of market environmental uncertainty on it depends on the prospect of incremental profits. The rest of the determinants are derived from the incentive intensity principle, including some features of management accounting systems. In this study, the effects of the determinants are supported as expected in principle. In particular, the incentive intensity is influenced by the prospect of incremental profits, an agent’s risk preference, and their responsiveness to incentives. As for the moderation effect, the positive effect of the incentive intensity on the performance is decreased by an agent’s risk aversion. Our empirical results explain mixed evidence in previous studies and are consistent with the agency theory.

Keywords: Incentive intensity, Environmental uncertainty, Risk preference, Foreign subsidiary management, Survey

How to Cite:

Nishii, T., Kondo, T. & De Zoysa, A., (2024) “The Determinants and Effect of the Incentive Intensity: Empirical Evidence from Japan”, Australasian Accounting, Business and Finance Journal 18(2), 4-32. doi: https://doi.org/10.14453/aabfj.v18i2.02