Value-based Performance Measures Research Articles

Net value created: measuring a non-life insurer’s performance

The measure Net Value Created (NVC) captures periodic deviations of planned for and realized net present values at a specific reporting date. Therefore, NVC provides control-related signals about the company’s performance additional to economic value added/residual income measures. In this paper we adopt the NVC to the Flow to Equity approach, commonly used in non-life insurance company valuation. In a multi-period context the NVC allows for an update of information over time regarding planned for and realized values and, it further allows for a separation of value contributions of the main insurer’s business units and value contributions due to a change in cost of capital. Thus, NVC is useful for value-based performance measurement in the retrospect and for strategic (investment-) decision support in the prospect for non-life insurance companies.

Interrelationships Among Corporate Performance Measures

Firm Value Maximization as the objective function will guide managers in making the optimal business tradeoffs. While firm value maximization as a goal is widely accepted; not many agree on one way of achieving itTraditionally corporate performance is measured using some variant of historical accounting income like Net Profit, EPS or some measures based on the maximizing accounting income will lead to firm value maximization.There is growing criticism about the linkage of traditional measures and firm value and their ability to be consistent predictors of firm value creation. This lead to the mergence of value based performance measures This paper attempts to provide some understanding of the interrelationships among select corporate performance measures in the Indian setting

Corporate Governance Index and Firm Performance: Empirical Evidence from India

Prior studies using an index of corporate governance to explore the relationship between corporate governance and firm performance have found a positive linkage between the two i.e. better governed firms exhibit better financial performance. Following the seminal work of Gompers, Ishii, and Metrick (2003) of creating a corporate governance index to study the relationship between corporate governance and firm performance, similar studies have been reported not only from developed markets like Germany, Canada, Hong Kong, Switzerland, and Australia, but also from emerging markets like Ukraine, Russia, Greece, Thailand, and India.In the present study, we investigate the relationship between corporate governance and firm performance in the Indian context by constructing a corporate governance index based on internal and external corporate governance mechanisms. Further, we use value-based performance measure - Economic Value Added (EVA), as the primary metrics to measure firm performance. Besides EVA, traditional measures such as Return on Networth, Return on Capital employed and Tobin’s Q have also been used to evaluate the linkage between corporate governance and firm performance. Using various econometric techniques, we conclude that there is a positive relationship exists between corporate governance based on the corporate governance index and firm performance, when the performance is measured in terms of the value-based performance tool – Economic Value Added (EVA). The relationship could not be validated for the traditional performance tools – RONW, ROCE or Tobin’s Q.

Determinants of the Use of Value-Based Performance Measures for Managerial Performance Evaluation

As value-based (VB) performance measures include firms' cost of capital, they are considered more congruent than earnings measures. Prior studies, however, find that their use for managerial performance evaluation is less extensive than their presumed benefits would suggest. We examine how the importance of VB measures for evaluation varies with firms' need and managers' opportunity to manage capital costs, and find this to increase with a need for intensive asset use, delegated authority and reduced unit interdependencies. In addition, importance of intensive asset use simultaneously limits the delegation of authority, partially offsetting the increase in importance of VB measures. © 2013 Blackwell Publishing Ltd.

Performance measures and learning

New developments in performance measurement, like the balanced scorecard or value-based performance measures, tend to improve decisions by increasing the reflection of organisation goals in these new measures. However, they are also placing greater demands on decision makers’ cognitive abilities in terms of perception and interpretation. This paper picks up the question of how these developments might influence the possibilities to learn and thereby the quality of long-term decisions. As the research object – learning of cognitively restricted individuals using performance measures – exhibits a high degree of complexity and still is quite unexamined, the paper adopts an explorative approach and bases its analysis on a computer simulation. Taking into consideration the usual restrictions on the generalisability of results obtained from simulation experiments, the findings nevertheless indicate that although new trends in performance measurement aim at the improvement of decision quality and learning throug...

Determinants and consequences of applying value-based performance measures: the German evidence

This paper examines the determinants of applying value-based performance measures like economic value added (EVA) and the impact of applying these measures on firms' returns. Our research design exploits a unique situation in Germany, where a regulatory change requires firms to describe their performance measurement system in their annual report since 2006. Analysing these disclosures, we find that firm size and firm age have a positive impact on the propensity of applying value-based performance measures. In a second analysis, we are not able to document a positive influence of the application of value-based performance measures on firms' performance. However, we find a significant positive association with firm valuation when controlling for self-selection. The paper contributes to the literature, as it is the first to comprehensively investigate the determinants and consequences of applying value-based performance measures.

EVA Reconsidered for the Greek Capital Market

The present study examines the explanatory power of one value based performance measure (Economic Value Added) and three other traditional accounting measures (Earnings Per Share, Return On Investment, Return On Equity) in explaining stock market returns in the framework of Athens Stock Exchange for the period 1996-2005. Methodology is based on studies performed for the same capital market by Maditinos, Theriou and Sevic (2005; 2006), Maditinos, Sevic and Theriou G (2007), Maditinos, Sevic, Chatzoglou and Theriou (2007) and Maditinos, Sevic, Theriou and Demetriadis (2007). Results show EPS to provide the greatest value relevance in explaining stock market returns consistent with that of previous studies. Moreover, the explanatory power of the pair wise combinations of EVA with each traditional accounting performance measure is also examined. The pair wise combination of EVA with EPS grants for a significant increase of the explanatory power, compared to EPS explanatory power examined alone (from 2.9 to 7.6 per cent), in explaining stock market returns, consistent again with the previous findings.

Performance Measures: An Application of Economic Value Added

Economic Value Added (EVA) is a value based performance measure that gives importance on value creation by the management for the owners. Profit maximization as a concept is age-old, wealth maximization is matured and value maximization is today’s wisdom. Stern Stewart’s EVA raises storm in corporate world and gives a new way to think about rewarding management. Usability of EVA largely depends on the quality of accounting information system, as traditional information system will not provide sufficient information to compute true EVA. Thus, EVA is required to be tailored in line with accounting system, management philosophy and the degree of demand of such a system. In this paper, an earnest effort has been made to explain theoretical foundation of EVA with its origination, definition, ways to make it tailored, adjustments required, scope and some other related issues. The methodology used is a type of theoretical mining of logics resulting a step-by-step process required for EVA implementation. As corporate house plans to move from traditional to value based performance measures, EVA would yield good result and the paper may become helpful to them to comprehend the methodology.

Value-based performance measurement in supply chains: a case study from the packaging industry

This article investigates the development of a value-based performance measurement concept in supply chains on the basis of a case study from the packaging industry. The value-based view offers a direct link between operating supply chain activities and shareholder value creation expressed in the economic value added (EVA®). The present article differs from previous examinations of performance measurement since it consequently matches the operative key performance indicators directly via value drivers to the ultimate measure of the value generation of a company. In addition, the article identifies different gaps that require further research in the area of managerial accounting and performance measurement in supply chains.

Chinese Firms' Use of Management Accounting and Controls: Facilitators, Impediments, and Performance Effects

ABSTRACT: This study explores the current use and performance effects of management accounting and controls (MACs) by Chinese firms, as well as some potential facilitators and impediments. Data on 219 listed Chinese firms are obtained from a survey, supplemented by the firms' publicly available financial reports. On average, the sample firms have at least moderate use of 12 specific MAC techniques, including ones that are of relatively recent vintage (e.g., economic value-based performance measures). However, there is substantial variation across firms in the use of each technique. The extent of MAC usage is positively associated with firm attributes (e.g., activism of corporate governance participants, management support), as well as characteristics of the environment (e.g., competition). There also is a positive association between usage of some MACs and firm performance.

THE FOREIGN BANK EFFECT ON VALUE CREATION IN COMMERCIAL BANKS INCORPORATED IN THAILAND

Using quarterly bank-level data over the period 1997–2005, this paper examines the effect of foreign bank presence on commercial banks incorporated in Thailand, using traditional and value-based performance measures as indicators of the degree of competition and proxies for the efficiency in the provision of banking services. The findings suggest that foreign bank presence is not only beneficial in terms of traditional performance measures, but also in terms of economic profit. The results with respect to economic value added and cash value added, however, cast some doubt over the presumed benefits of opening up, underlining the importance of using a proxy that considers the cost of equity and departs from standard accounting principles. Furthermore, the results indicate that foreign entry through the acquisition of domestic banks appears to have a stronger and more beneficial impact on locally incorporated banks than through the establishment of branches, with majority ownership by a foreign blockholder being of importance.

Performance Measurement, Value-Creation and Managerial Compensation: The Missing Link

The discussion on value-based performance measures is centered around the concept of residual income. The main property of residual income is its connection to capital budgeting and the net-present-value-rule. This property is, however, not sufficient to guarantee strong goal congruence between management decisions and the firm's objectives. So far, the literature suggests compensation schemes based on modified accounting rules in order to induce the manager to make optimal investment decisions. In contrast, we show that strong goal congruence is also attainable by modifying the compensation function. We develop an incentive scheme based on a bonus bank, which can be interpreted as a nonlinear contract. Within this concept, we provide a link between the incentive system and the actual creation of value, measured by a performance measure derived from Excess Value Created.

Determinants of the Weight on Value-Based Performance Measures in Managerial Performance Evaluation

Determinants of the Weight on Value-Based Performance Measures in Managerial Performance Evaluation

Performancemessung und Wertgenerierung: Entlohnung auf Basis des Residualen Ökonomischen Gewinns

Wertorientierte Steuerungskennzahlen sollen den Zielerreichungsgrad bezuglich der Steigerung des Eigentumervermogens wiedergeben. Andererseits sollen sie auch die spatere Umsetzung des ursprunglich geplanten sicherstellen. Um dezentrale Manager zu zielkonformem Verhalten anzureizen, basiert deren variable Vergutung haufig auf diesen Steuerungsgrosen. Zielkongruente Steuerungssysteme werden bislang in der Literatur im Wesentlichen auf Basis von Residualgewinnen kombiniert mit speziellen Gewinnermittlungsregeln gesucht. Hier wird ein Vorschlag unterbreitet, wie dies mit einer speziellen Kennzahl Residualer Okonomischer Gewinn und einem speziellen Auszahlungsplan fur die darauf basierenden Boni, einer sog. Bonusbank, gelingen kann.

Empirical Study on Value-Based Performance Measures, Stakeholder Satisfaction and Stock Prices

This paper examines the effects of three different types of performance measurements on the Dow Jones Industrial, Transportation, and Utilities company stock prices: traditional accounting based measures, value-added measures, and nonfinancial based measures. The accounting based measures are return on equity and return on assets; the value-added measures are market value-added and economic value-added; the nonfinancial measures are proxies of sales, times-interest-earned, and taxes representing customer and bondholder satisfaction, and government and society. 
 Using cross-sectional data and regression analysis, the results indicate that all performance measures have the expected relationship with prices. Return on equity has a strong and positive effect on share values. Consumer satisfaction, measured by sales volume, also showed a strong relationship with stock prices. However, the significance of the relationship between bondholder satisfactions measured by the times- interest-earned ratio and prices varied from positive to negative and was insignificant. The effect of taxes paid by corporations as proxy for the government as a stakeholder and corporate social responsibilities on share values was mostly insignificant. Overall, the results show that stock price maximization as the primary goal of a firm may lead to the satisfaction of stockholders and consumers. However the relationship between price maximization strategy and bondholders and society satisfaction require further investigations.

Wertorientierte Personalarbeit zwischen Mythos und Mikropolitik

Aufgrund eines verstärkten ökonomischen Legitimationsdrucks und des zunehmenden Einflusses des Shareholder-Value-Denkens wuchs in größeren Unternehmen das Interesse der Personalpraxis an Konzepten wertorientierter Personalarbeit. Obwohl die zugrunde liegenden indikatorengestützten Messkonzepte mit erheblichen methodischen Einwänden konfrontiert sind, sollen sie den Nachweis personalwirtschaftlicher Beiträge zur Steigerung des Eigentümerwerts ermöglichen. Der Aufsatz analysiert die Gründe für die – ungeachtet der methodischen Einwände – zunehmende Verbreitung der Konzepte wertorientierter Personalarbeit aus einer organisationstheoretischen Perspektive. Letztere verbindet unter Rückgriff auf die Idee der Strukturdualität die Analyse organisationaler Rationalitätsmythen mit der Betrachtung zentraler Akteursinteressen. Vor diesem Hintergrund erweist sich der Erfolg wertorientierter Personalarbeit nicht zuletzt als das Resultat einer umfassenden sozial-organisationalen Integrationsleistung, die kollektive Mythen mit individuellen Akteursinteressen organisationsstrukturell koppelt.

Consumer originated value: A framework for performance analysis

While the marketing concept provides the strategic motivation that continues to turn American business towards the marketplace, little attempt has been made to create a metric that is specifically intended to reflect the role and importance of the consumer on improved organizational performance, especially when evaluating intangibles as services and intellectual contribution. Traditionally, productivity measures have been used to evaluate performance improvement that are internally originated and not externally oriented, as suggested by the marketing concept. Therefore, productivity measurement generally fails to measure the customer/consumer originated value developed by service processes and does not account for performance improvement due to other highly intangible factors such as quality or difficult to quantify consumer benefits. Herein, customer/consumer originated value is explored as a basis for organization wide performance measurement that is synchronous with the market driven directive: customer focus. The authors present a theoretical framework that develops and supports the use of value based performance measures.

Management control systems in Finnish technology companies: search for a typology of MCS mix

The purpose of the paper is to search for a typology of management control system mix (MCSM) in 110 Finnish technology firms. MCSM is considered as a portfolio of management control mechanisms. In a MCSM, single systems are implemented and changed as a package. Instead of analysing such single systems, this paper is focused on a mix (package) of such systems that forms a more natural entity of controls. These MCSMs are assumed different for firms with different organisational characteristics. The paper is organised as follows. First, hypotheses on the relationship between background (organisational) variables and the implementation of and changes in MCSMs are presented. Second, a postal survey of MCSs is performed and responded by 110 firms. Third, the proposed hypotheses are tested for each single MCS by simple statistical tests. Fourth, typologies of MCSM implementation and change are searched by the factor analysis to empirically find out typical combinations of MCSs. Fifth, the extracted hypotheses are tested for the factor scores associated with MCSMs. The analysis showed that there are four basic types of MCSMs for implementation and change. These types are associated with different mixes of MCSs and affected by different organisational variables. The MCSMs for change found by the factor analysis can be classified in the following control packages: value-based management systems (change), performance measurement and improvement systems (change), activity- and process-based management systems (change) and production planning systems (change). For implementation, the third mix was merely entitled as time- and activity-based management system (implementation) while all other MCSMs were similar. Of all the organisational variables, only the size of the organisation proved to be statistically significant for all the types (MCSMs).

Using Value-Based Performance Measures to Improve Hotel Profitability

Relative to enterprises from other business sectors, hotels have relatively high proportions of physical assets and fixed costs. Further, because their products are perishable and cannot be stored in inventory, hotels cannot use over- or under-production relative to sales to manage their capacity. As such, profitability especially hinges on the effective allocation and use of resources. How a hotel measures and rewards its managers' performance can significantly affect the latter's attention to these issues. This article shows how commonly used, traditional financial performance measures may fail to motivate or guide effective resource allocation and use. It also shows how value-based performance measures, which charge managers for the opportunity cost of capital that they use, may be more effective for inducing such results. Findings from a survey of hotel managers support the existence of such potential benefits. They also provide the basis for suggesting important considerations for successful implementation.

Economic Value Added (R) - Application to Portuguese Public Companies

Economic Value Added (EVA (R)) is a value-based performance measure developed by Stern Stewart & Co. that offers a means of measuring and communicating performance and that may be used in setting performance targets, paying bonus, and valuing capital projects or companies. Based on a survey of Portuguese public companies listed on the Lisbon Stock Exchange, research was carried out on the awareness and the utilization of various performance measures. The results indicate that managers elect performance measures based on net income. Yet more sophisticated measures such as EVA or CFROI are being increasingly adopted. The major contribution of this study is the analysis of the information content regarding Operating Income, Net Income and EVA, based on a sample of 39 Portuguese public companies during the period from 1995 to 1998. The main results suggest that EVA does not have more information content than traditional performance measures in explaining Equity Market Value. The relationship between EVA and Market Value Added (MVA), however, is statistically significant.