Given the debate in both the professional and scholarly literature on the effectiveness of management accounting systems in the contemporary business environment, there is a need to understand more about the impact of activity‐based costing (ABC). In this paper, we show that the choice of a management accounting system, such as ABC, may have a significant impact on firm value. Specifically, for a sample of U.K. firms, we show that firms adopting activity‐based costing techniques outperform matched non‐ABC firms by approximately 27 percent over the three years beginning on January 1 of the year in which the ABC techniques are first implemented. This result is robust to different matching criteria and for both accounting and market‐based measures of performance. Further analysis suggests that ABC adds to firm value through better cost controls and asset utilization, coupled with greater use of financial leverage.

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