Electronic copy available at: http://ssrn.com/abstract=1689257 ON TESTING BUSINESS MODELS * David Huelsbeck Kenneth A. Merchant Tatiana Sandino Leventhal School of Accounting, Marshall School of Business University of Southern California September 30, 2010 ABSTRACT This study explored management decisions regarding formal empirical testing of business models. It documented a test of one company’s business model under seemingly favorable conditions for such a test – a successful single product firm following a consistent strategy over a long period of time with stable management and publicly traded stock. Although the findings provided only weak support for the hypothesized business model, the confidence of the company’s top managers in their business model remained high. Further analysis revealed that the managers’ response to the test results was consistent with that expected of Bayesian-rational agents. Our analyses provided the basis for development of a framework for understanding the expected value of testing business models in various circumstances. This framework may explain apparent contradictions between previous studies containing normative statements regarding the value of testing business models. Keywords: Performance measurement, non-financial performance measures, business models, management control Data Availability: The data used in this study are derived from a proprietary dataset and public sources *We acknowledge valuable comments from Dennis Campbell, Clara Chen, Robert Chenhall, Yaniv Konchitchki, Kari Lukka, Tatiana Melguizo, Hanne Norreklit, Frank Selto, Sally Widener and seminar participants at University of Auckland, the 2009 Global Management Accounting Research Symposium, and the 2009 American Accounting Association Annual Meeting. We also thank Fei Du for her capable work as research assistant on this project, as well as personnel at our research site for their time and efforts in providing both data and insights about their company’s hypothesized business model. In addition, the support of CIMA (Chartered Institute of Management Accountants) is gratefully acknowledged. Please address questions and comments to Kenneth Merchant at kmerchant@marshall.usc.edu . Address: 3660 Trousdale Pkwy. Los Angeles, CA 90089-0441. Telephone: (213) 821-5920, Fax: (213) 747-2815.