Financial Performance Measures and Value Creation: the State of the Art
The choice of financial performance measures is one of the most critical challenges facing organizations. The accounting-based measures of financial performance have been viewed as inadequate, as firms began focusing on shareholder value as the prima
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Daniela Venanzi
Financial Performance Measures and Value Creation: The State of the Art
123
Daniela Venanzi Department of Business and Law University of Rome III Rome, Italy
ISSN 2191-5482 ISBN 978-88-470-2450-2 DOI 10.1007/978-88-470-2451-9
e-ISSN 2191-5490 e-ISBN 978-88-470-2451-9
Springer Milan Heidelberg Dordrecht London New York Library of Congress Control Number: 2011940802 Ó The Author(s) 2012 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the Italian Copyright Law in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the Italian Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)
To my parents, for their never fading support
Contents
Criticism of the Accounting-Based Measures of Performance 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Inaccuracy and Subjectivity of the Accounting Numbers . . 1.3 Nonalignment with the Goal of Maximizing Shareholder Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Short Termism of Managerial Decision-Making . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Competing Financial Performance Measures. . . . . . . 2.1 Trends in Performance Measurement . . . . . . . . . . 2.2 Economic Value Measures . . . . . . . . . . . . . . . . . 2.2.1 The General Framework . . . . . . . . . . . . . 2.2.2 Economic Value Added (EVA). . . . . . . . . 2.2.3 Cash Flow Return on Investment (CFROI). 2.2.4 Shareholder Value Added (SVA) . . . . . . . 2.2.5 Economic Margin (EM) . . . . . . . . . . . . . . 2.2.6 Cash Value Added (CVA) . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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The Metrics War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Overstated Claims? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Association Between Economic Value Measures and Stock Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Association Between Economic Value Measures and DCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Managerial Implications of the Economic Value Measures . References . . . . . . .
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