Transaction cost economics as a predictor of management accounting practices at the Hudson's Bay Company,1860 to 1914

Abstract

With its emphasis on cost minimisation, transaction cost economics (TCE) predicts that as asset specificity and uncertainty increase, thereby making transaction management more difficult, the use of hierarchy for managing transactions will also increase. It follows that as a hierarchical mechanism for managing transactions, management accounting will also be positively associated with asset specificity and uncertainty. Roy and Spraakman (1996) tested those propositions with evidence from the Hudson's Bay Company. The evidence supported those propositions for the 1821 to 1860 period when the Company had extensive asset specificity and uncertainty. Compared to that frontier period, between 1860 to 1914 the Company experienced a decrease in uncertainty as communications and transportation modernised. During this later period, the Company's transportation network became worthless. The transportation network's devaluation was equivalent to a decrease in asset specificity. With less asset specificity and uncertainty, TCE predicts decreases in hierarchical governance and the use of management accounting information. Evidence for the 1860 to 1914 period was largely consistent with those predictions.