What is LIFO in accounting terms

Value-based performance measurement: Presentation and comparison of selected concepts

Table of Contents

List of figures

List of tables

Sample directory

List of abbreviations

1 Introduction
1.1 Problem
1.2 Objective and course of work

2 Performance Measurement
2.1 Definition of terms
2.1.1 Performance
2.1.2 Performance Measurement
2.2 Performance Measures
2.2.1 Statistical and methodological point of view
2.2.2 Timing
2.2.3 Assessment Approach
2.2.4 Observation level
2.2.5 Addressees

3 Company value orientation
3.1 The basic idea
3.2 Development of the shareholder value idea
3.2.1 Criticism of traditional performance indicators
3.2.1.1 Fundamental shortcomings in absolute accounting profit figures
3.2.1.1.1 Legal leeway in external accounting
3.2.1.1.2 Neglecting the time value of money
3.2.1.1.3 Neglecting the risk
3.2.1.1.4 Neglect of investment requirements
3.2.1.1.5 Neglecting economic effects after the observation period
3.2.1.1.6 Insufficient correlation with the performance on the capital market
3.2.1.1.7 Effects of the criticism of “traditional” control parameters
3.2.1.2 Fundamental shortcomings in relative accounting profit figures
3.2.1.2.1 Return on Investment (ROI)
3.2.1.2.2 Return on Equity (ROE)
3.2.2 Further pioneers of the shareholder value approach
3.2.2.1 The wave of mergers and acquisitions
3.2.2.2 Emergence of a market for corporate control
3.2.2.3 Information asymmetries
3.2.2.4 Increasing importance of institutional and foreign investors
3.2.2.5 Further development of strategic management
3.2.2.6 Increasing mobility of capital
3.3 Conclusion

4 company value-oriented indicators
4.1 Basics of company valuation
4.1.1 German-language assessment theory
4.1.2 Development in the USA
4.2 The shareholder value concept
4.2.1 Basics
4.2.2 Determination of shareholder value
4.3 Discounted Cash Flow Method (DCF)
4.3.1 Basic DCF concepts
4.3.1.1 Entity approach
4.3.1.2 Equity approach
4.3.1.3 Adjusted Present Value procedure
4.3.1.4 Criticism of the DCF procedure
4.3.2 Modern DCF concepts
4.3.2.1 Approach according to Rappaport
4.3.2.2 Approach according to Copeland / Koller / Murrin
4.4 Internal rate of return method
4.4.1 Basic concept
4.4.2 Cash flow return on investment
4.5 Residual Profit Concepts
4.5.1 Basic concept of residual profit
4.5.2 Gap theorem
4.5.3 Modern residual profit concepts
4.5.4 Economic Value Added
4.5.5 Economic Profit
4.5.6 Cash Value Added

5 Comparison of the presented concepts
5.1 Requirements for value-based performance measures
5.2 The comparison
5.2.1 Value orientation
5.2.1.1 Future orientation
5.2.1.2 Payment flow reference
5.2.1.3 Consideration of risks
5.2.1.4 Taking into account the time value of money
5.2.1.5 Correlation to the market value
5.2.2 Suitability for performance measurement
5.2.2.1 Freedom from manipulation
5.2.2.2 Applicability
5.2.2.2.1 Data availability and determination effort
5.2.2.2.2 Comprehensibility and acceptance
5.2.2.3 Comparability
5.2.2.3.1 Comparability of different companies
5.2.2.3.2 Comparability over time
5.2.2.4 Period accuracy
5.2.2.5 Incentive orientation
5.3 Summary assessment of the value-based performance measures

6 Summary and Outlook

bibliography

List of figures

Figure 1: Performance measurement as a phase of the control cycle

Figure 2: Accounting vs. residual income measurement of success

Figure 3: Basic types of behavioral insecurity among owners in relation to management

Figure 4: Main functions of company valuation

Figure 5: Forms of the decision value

Figure 6: Components of the shareholder value concept

Figure 7: Value-oriented performance measures and their “modern” calculation methods

Figure 8: Overview of the DCF procedure

Figure 9: Overview of different FCF definitions

Figure 10: Determination of the free cash flow

Figure 11: Determination of the cost of equity based on the CAPM

Figure 12: The shareholder value network

Figure 13: Relationship between free cash flow and central value drivers in the concept of Copeland / Koller / Murrin

Figure 14: Calculation components in the CFROI concept

Figure 15: Determination scheme for EBV and NOPAT

List of tables

Table 1: Balance sheet policy and balance sheet ratios

Table 2: Standard & Poor’s 500 Index earnings per share growth and owner returns, 1986-1996

Table 3: Empirically collected market risk premiums

Table 4: Assessment of the value orientation

Table 5: Evaluation of the freedom from manipulation

Table 6: Assessment of applicability

Table 7: Assessment of comparability

Table 8: Evaluation of the correctness of the periods

Table 9: Evaluation of the incentive orientation

Table 10: Summarized comparison of the value-based concepts

Sample directory

Example 1: ROI underinvestment incentive

Example 2: gap theorem

Example 3: Alternative depreciation methods for Economic Value Added

Example 4: Suitability of the concepts for incentive problems

List of abbreviations

Figure not included in this excerpt

1 Introduction

1.1 Problem

The search for suitable metrics to measure operational performance is an essential area in theory and practice of corporate management. After all, it is in the special interest of a company's stakeholders to know how successful the company is.

The shareholder value approach began to gain a foothold in the United States in the mid-1980s. Shareholder value is a much-discussed and highly polarizing word. An appropriate translation of the term into German is “market value of equity”. The underlying idea is that the primary goal of corporate management must be to align itself with the market value of equity and to increase the value of a company on a sustainable basis. This idea is not new. One of the main lines of economic theory has long required managers in companies in which there is a separation between ownership and management to base their decisions on the interests of the owners, since they, as owners of residual claims, bear the greatest risk. Owner orientation does not have to stand in opposition to the interests of other stakeholders (e.g. lenders, employees, customers, suppliers, public authorities) of a company, because a market value-maximizing strategy can only be implemented if these contractually secured claims are taken into account.[1]

Starting with Rappaport[2] In 1986, a number of concepts for corporate value-oriented management were developed at American business schools. Existing ideas from financing and capital market theory were transferred to corporate management. The ideas were taken up by management consultancies that specialized in the implementation of shareholder value approaches.[3] This supported the widespread dissemination of the shareholder value idea in business practice.

Based on this boom in the concept of shareholder value in the USA, corporate value-oriented concepts have also found widespread use in the German-speaking area since the beginning of the nineties. So especially wore Stage with numerous publications to the dissemination of the ideas. Some large companies, such as Siemens, Veba or RWE, began to expand their corporate goals to include the goal of creating shareholder assets.[4] Today, even among the companies in the A segment of the Vienna Stock Exchange, there is hardly a company that does not refer to the importance of this objective in its annual reports. Due to the prevailing resentment in public opinion towards the term "shareholder value", however, different expressions are sometimes used for the commitment to orientation towards company value (e.g. "Value Management" at Wienerberger or "Value Based Management" at VA Tech) .[5]

With the commitment to shareholder value, the question arises of how this objective can be implemented and measured in operational practice. To this end, some key figures have been developed over the past 15 years, whose range of application extends from the original idea of ​​determining a (total) company value for evaluation purposes today through resource allocation to performance evaluation.

The best known and most common value-based financial measures are those of McKinsey touted discounted cash flow method by the New York Consulting Stern Stewart & Company developed economic value added[6] (EVAâ) and especially of the Boston Consulting Group used cash flow return on investment (CFROI).

1.2 Objective and course of work

Within the scope of this work, these concepts are to be subjected to a critical comparison with regard to their suitability as instruments for measuring operational performance.

In a first step, the term “performance measurement” is discussed. The definition of the term that is relevant for this work is derived from the existing literature on the topic. It is of particular interest to work out the purpose and functions of performance indicators and to explain the different areas of application of these variables (Chapter 2).

Subsequently, the shareholder value idea and the developments that have led to its widespread use in the American and German-speaking countries are presented. The main focus is on the criticism of accounting measures of success, because dissatisfaction with these measures was one of the most important reasons for the rapid spread of the shareholder value idea (Chapter 3).

In the following, the concepts of Discounted Cash Flow, Economic Value Added and Cash Flow Return on Investment are presented in detail (Chapter 4). First, the theoretical basics of the individual concepts and then their modern forms of expression are presented.

Building on this basic knowledge, a comparison of the value-oriented concepts for performance measurement takes place on the basis of the criteria value orientation, freedom from manipulation, applicability, comparability, period fairness and incentive orientation (Chapter 5). The requirement criteria were defined after reviewing the relevant literature on the subjects of performance measurement and value-oriented corporate management. The respective strengths and weaknesses of the individual shareholder value concepts are summarized in a review.

Chapter 6 summarizes the most important results of the work. An outlook on current developments in the field of performance measurement with special consideration of non-financial parameters rounds off the work.

2 Performance Measurement

"The choice of performance measures is one of the most critical challenges facing organizations. Performance measurement systems play a key role in developing strategic plans, evaluating the achievement of organizational objectives, and compensating managers. "[7]

2.1 Definition of terms

2.1.1 Performance

The term “performance”, which is often used, has not yet been clearly translated in the German-language business literature. In fact, there are a number of definitions, often different.

“To provide performance” means to achieve desired goals or desired conditions or to make a contribution to the achievement of certain goals.[8] "Performance therefore never exists absolutely, for itself, but always arises in the context of specific (company) goals."[9] The viewer's point of view determines the meaning of the term and its measurement. The term “performance” could be freely translated as “performance”.[10],[11]

But even the term "performance" leaves a lot of room for interpretation. The concept of performance can be understood as a productive activity (performance as a concept of action) or as a result of this activity (performance as a concept of being).[12]

In German-language business literature, “performance” usually refers to either the result of business activity in general or the positive component of business success that is complementary to costs in the field of cost accounting.[13] The calculation variable performance comprises the assessed, objective-related goods production of a period.[14]

Regardless of the underlying data material, performance can be understood as the assessed contribution to achieving the goals of an organization, which is made by individuals or groups within the organization as well as by external groups.[15]

In the context of this work, under the term "performance" realized or future-oriented results of company goal-related actions be understood.[16]

Realized results relate to success variables (e.g. profits or cash flows) from past periods, while future-oriented results are based on actions that will only become realized results in future periods (e.g. planned strategies or projects). "Company goal-related" means that the relevant actions make a contribution to the achievement of set company goals.[17]

2.1.2 Performance Measurement

Similar to “performance”, the term “performance measurement” is also used very often in business literature, but no uniform definition and classification has emerged to date. Often, performance measurement is equated with the control function of the system-theoretical control cycle (planning - control - control) (see Figure 1).[18]

Figure not included in this excerpt

Figure 1: Performance measurement as a phase of the control cycle[19]

Performance measurement is used to support decision-making and to influence behavior in the company. Decisions in larger companies are typically not made centrally, rather decision-making powers are delegated: Better informed managers should make decisions "on site" that are in the interests of the head office or the owners. The objectives of the subsidiaries (managers) and the headquarters do not necessarily match. In such a situation, it is the task of the head office to create suitable framework conditions for investment decisions. Both personal and factual coordination problems must be encountered[20] get noticed. Among other things, it depends on how the success of individual departments is measured and what consequences are linked to the performance measures.[21]

Performance measurement is a means of focusing attention on an organization's goals.[22] Performance measurement has to be oriented closely to the information needs of the users of these measured variables (usually the company's stakeholders). There is thus a close connection between the objective and the addressees of performance measurement.[23]

Lebas identifies five reasons why performance is measured. For all these reasons, planning, coordination and control tasks are in the foreground. The five causes can be described in question form as follows:[24]

- Where was the organization in the past?
- Where is the organization today?
- Where should the organization develop in the future?
- How will the organization get there?
- How will the organization know that it has achieved its goals?

These questions provide the information that Simons et. al. as early as 1954 it was regarded as the critical information for managing a company: information on "scorekeeping", "attention directing" and "problem solving".[25]

Kaplan / Atkinson similarly state that the control process comprises the following stages:[26]

- setting a performance target,
- the measurement of the performance,
- the comparison of target and actual performance,
- a deviation analysis and
- taking adequate measures if necessary.

To Klingebiel The understanding of control is shaped by the following three views:[27]

- “You cannot manage what you cannot measure.
- What gets measured gets done.
- Measurement influences behavior. "

With this approach, the behavior-influencing aspect of performance measurement is emphasized. It shows that a performance measurement system should be coupled with an incentive system in order to ensure a high level of goal identification at employee level.

However, performance measurement does not have to be purely past and present-oriented, but should also be future-oriented. A distinction can be made between three different measurements or types of measured quantities:[28]

- Realized, past and present-oriented actual values,
- forecast, future-oriented will-sizes and
- normative or set, future-oriented target values ​​from planning.

In the context of this work, Performance Measurement denotes the Measurement of the results of company goal-related actions. It is a process for quantifying the performance (target achievement) of a company, its subsystems and employees.[29]

2.2 Performance Measures

Performance measurement takes place with the help of performance measures. A performance measure is understood to be a metric by means of which the performance of a company or its sub-units or employees can be measured and evaluated and by means of which performance goals can be formulated. Performance measures represent an informational consolidation of economically relevant facts.[30]

Performance measurement is not limited to the measurement of financial parameters. In the past five years, there has been a strong trend towards considering and measuring non-financial success factors (e.g. customer satisfaction, innovative strength).[31] Probably the best-known concept that also takes non-financial indicators into account is that of Kaplan / Norton developed "Balanced Scorecard".[32]

In practice, a dominance of financial indicators can be determined. Kaplan / Atkinson cite two reasons for the widespread use of monetary variables: First, these measures correspond directly to the long-term goals of a company, which are mostly of a financial nature. Second, they provide a summary of the overall performance of a company.[33]

Since the aim of this thesis is to present and compare financial performance measures, only these will be considered in the following.

Financial measures are aggregated values ​​that provide information about the monetary success of a company or a company division. They mostly come from the company's internal or external accounting and can be categorized using the following key dimensions:

2.2.1 Statistical and methodological point of view

Financial performance measures can be divided into absolute and proportional values. The absolute values ​​can be single numbers, sums or mean values ​​(e.g. sales, profit). Relative values ​​are geared towards comparisons and can be subdivided into relationship, structure or index numbers (e.g. return on sales, equity ratio,% sales growth).[34] One shortcoming of absolute values ​​is that they are hardly indicative of any kind on their own, i.e. without comparison with other figures.

2.2.2 Timing

When measuring the success of operational activities, a distinction can be made between static (period-related) and dynamic (cross-period) key figures. While the static method is used to assess success for a period, the dynamic concepts focus on a key date-related success assessment based on a multi-period or total period analysis. In operational practice, planning, investment and investment decisions are usually made on the basis of dynamic concepts (future-oriented), whereas fee decisions are supported by static concepts (past-oriented).[35]

2.2.3 Assessment Approach

The financial performance measures can be based on either an accounting-based (pagatory or imputed) or cash flow-oriented evaluation approach. As will be shown in Chapter 3, dissatisfaction with traditional measures of success such as accounting profit or the ROI based on it was a major trend that has led to the rapid adoption of enterprise value-oriented concepts that are usually cash-flow-based.

In this context, it appears interesting that in operational practice investment decisions are often made dependent on the expected cash flows, while controls and performance assessments are often carried out on the basis of data from period-related accounting.[36]

2.2.4 Observation level

Performance can be measured for any business area for which goals have been defined. Performance measurement is therefore carried out at the overall company level, company area / department-oriented, for individual investments and systems or at the workplace level.[37]

2.2.5 Addressees

All stakeholders in a company have varying degrees of interest in information about its performance. The motives for this, however, are different. As an internal addressee, management primarily needs detailed information to control the company.

The needs of external addressees (especially creditors and tax authorities) are largely covered with figures from financial accounting. The profit under commercial law is used to define a variable with the help of which the claims of the shareholders for profit distributions are delimited from one another. For reasons of creditor protection in particular, it is determined up to what amount payments can be deducted from the company. Last but not least, the claims of the tax authorities are determined with the profit under commercial law. In addition, the annual financial statements have the task of informing the stakeholders about the asset, financial and earnings position of the company and of giving an account of the course of business.[38] Since profit determination standards in German-speaking countries are largely based on the protection of creditors and the principle of prudence, the figures from external accounting seem unsuitable for controlling the company (see also Chapter 3).

The following chapter presents the idea and the development of corporate value orientation. The requirements that are placed on company value-oriented performance measures are only discussed in Chapter 5, after the individual value-oriented concepts have been presented and the reader is better acquainted with the topic.

3 Company value orientation

3.1 The basic idea

"'Doing business' ethymologically means nothing other than 'creating value'. Values ​​arise when the sum of all assessed resource consumption going into a product or service is less than the value of the product or service resulting from the transformation. "[39]

The core of (company) value-oriented corporate management is to make the return of the long-term shareholder (owner) the central target of corporate management.[40] Value-based management puts the owner (s) of a company at the center of attention. The return on ownership, the components of which are profit distributions and changes in the company's value - in relation to the capital employed by the owners - represents the benchmark that can be reached by consensus among shareholders in order to measure the company's economic success and management performance at the same time.[41] The basic idea is as simple as it is plausible: The equity investors are entitled to adequate interest on their capital employed; Value for the (long-term) shareholders is only created when the costs of the capital employed are covered. An investment is considered lucrative if, with the same risk, no higher return can be achieved with an alternative investment option. Conversely, equity providers will withdraw if this does not succeed in the long term. Since this "mobility" of the shareholders contributes to an efficient allocation of resources in the long term, maximizing shareholder value can be seen as a sensible corporate goal.[42]

Returns to property owners are created through dividends and price increases. The most important parameter for this is the total shareholder return (TSR), which is made up of price gain and dividend and shows what the shareholder actually earns on the bottom line.

The idea of ​​shareholder value orientation can be viewed on several levels. The shareholder value concept was originally used for the (external) assessment of the value of listed stock corporations. It is currently being discussed in particular as a management and controlling instrument for private companies of all legal forms and sizes.[43] The main areas of application of the shareholder value concept are therefore in the evaluation, investment planning, success and performance measurement, company value-oriented remuneration and as a management indicator both at the overall company level and for individual business areas and projects. The evaluation and performance measurement is carried out not only by internal company users but also by external users (e.g. financial analysts).[44]

The maxims of value-based corporate management are:[45]

- "Investments should only be made in projects that promise a minimum level of success commensurate with the risk. Only in these areas can growth make a contribution to increasing the company's value.
- Business areas that are less profitable - only viable through cross-subsidies - are to be sold or smashed.
- Freely available funds for which currently no i. S. the minimum return lucrative investment opportunity is to be distributed to the shareholders. "

3.2 Development of the shareholder value idea

The emergence of corporate value-oriented corporate management is largely due to the criticism of “traditional” key performance indicators (performance indicators), which led to the call for more adequate financial management instruments. The most frequently used accounting key performance indicators are profit and the profitability indicators derived therefrom (return on sales, return on equity and return on total capital). Earnings per share growth and the price / earnings ratio are particularly widespread in the USA.[46]

3.2.1 Criticism of traditional performance indicators

The profit determined in the annual financial statements of a company represents an important measure of success and establishes rights and obligations for the company: It represents, for example, the assessment basis for tax payments and the basis for deciding on the amount of dividends to be distributed. Therefore, the profit concept is usually at the top business target hierarchies.[47] In addition to accounting profit, there are other profit terms. Depending on the definition, different profit targets and profit terms can be guidelines for management. As a yardstick for measuring profit making is different Heinen between absolute and relative profit (profitability).[48] The absolute profit variables include, for example, paid profit, imputed profit or capital profit. The most important profitability metrics are return on equity (ROE) and return on investment (ROI).

In connection with the shareholder value approach, the accounting control parameters are accused of being unsuitable for measuring the goals of shareholders because they are primarily interested in future distributions and the value of their capital shares.[49] Critics argue that accounting performance measures promote corporate management geared towards short-term success and are valuation-dependent, i.e. can be designed by management. The time value of money and risk aspects were not taken into account. In addition, it is emphasized that these standards are incorrectly “calibrated” (Figure 2).[50]

Figure not included in this excerpt

Figure 2: Accounting versus residual income measurement of success

This criticism is very serious when one takes into account that the data from the annual financial statements are among the most important sources of information for shareholders and other capital market participants.[51] As a result, there may be a macroeconomic misallocation of scarce capital when investment decisions are made on the basis of reported accounting profits.[52]

In the following, the shortcomings of the absolute (accounting) profit figures are presented first. This is followed by a supplementary criticism of the relative profit sizes.

3.2.1.1 Fundamental shortcomings in absolute accounting profit figures
3.2.1.1.1 Legal leeway in external accounting

The legal regulations open up numerous approaches and valuation options for the preparation of annual financial statements. Above all, the approach and valuation options listed below have a significant influence on the amount of the reported profit:[53]

- The choice of the evaluation method (e.g. "last-in, first-out" or LIFO or "first-in, first-out" or FIFO),
- the choice of the depreciation method (linear, degressive, mixed) and the depreciation period,
- the way leasing is handled,
- the options for capitalizing and depreciating certain expenses (e.g. goodwill or the expenses for starting up and expanding a business) or
- the formation and dissolution of hidden reserves.

The advocates of the shareholder value idea criticize these accounting policy measures because they contribute to a distortion of the key performance indicators and make it difficult to make internal comparisons over time as well as between companies.[54] Instead, they recommend the use of cash flow figures that are largely beyond the scope of an individual assessment. "Incoming and outgoing payments [are] processes that are independent of valuation, namely inflows and outflows of means of payment. Income and expenses are also based on real processes, but if it is not a question of deposits and payments at the same time, there is always an additional one, namely an evaluation process and thus a theoretical interpretation of the real process. "[55]

Numerous empirical studies have attempted to measure the effects of accounting policy on the amount of reported profit. A case study by Kuing and Weber from 1987.[56] With the help of various accounting policy instruments, you have analyzed the scope for drawing up annual financial statements. As a result of this case study, the amount of the assessment margin is shown for various balance sheet ratios if, depending on the strategy, very high or very low profits are to be reported. The results of this investigation are summarized in the table below:

Figure not included in this excerpt

Table 1: Balance sheet policy and balance sheet ratios[57]

Another point of criticism of key figures based on annual financial statements is that continental European accounting regulations are unilaterally oriented towards the protection of creditors. As a result of the principle of prudence, assets are valued too low, liabilities and provisions are valued too high and many success factors are not recorded in the balance sheet.[58]

Classic examples for the inactivability of such success factors are:[59]

- the expenditure for research and development,
- the expenses for the training and further education of employees,
- the expenses for long-term marketing activities or
- Self-created software for fixed assets.

Commercial and tax law create leeway for management to hide profits from shareholders through the possibility of creating hidden reserves.[60] The possibilities of structuring the profit quality in connection with the information advantage of the management lead to the fact that the accounting profit appears unsuitable as a measure of performance for the shareholders as well as for external addressees who are dependent on the reporting of the management.[61]

Different approaches and valuation options in international accounting regulations have led to criticism that the annual financial statements of different countries can only be compared with one another to a limited extent. Günther states that different utilization of options does not lead to problems in performance comparisons if uniform regulations are made for all business areas within a company. When preparing consolidated financial statements according to §§ 244ff. HGB, the same accounting options must be exercised for all subsidiaries.[62] The main task of the consolidated financial statements is to convey information. In this context should also on the harmonization efforts in the international accounting in the form of the US-GAAP[63] and much more the IAS[64] be pointed out.

3.2.1.1.2 Neglecting the time value of money

Another cause of distortions in accounting performance indicators is the assumption of price stability.[65] The calculation of the profit ignores the time value of money ("time preference"), as it is based on nominal values. Inflationary influences are usually ignored. The times at which the income is paid out to the shareholders are not taken into account. From the point of view of a shareholder, however, one euro that is paid out to him today is worth more than one euro in a year, because he can invest the money alternatively in the meantime with interest.[66] When determining the economic value in the shareholder value concept, inflationary effects are explicitly taken into account by discounting the expected future cash flows using the discount rate.[67]

3.2.1.1.3 Neglecting the risk

The level of risk is of central importance for the economic value of any asset. However, it is not taken into account in accounting profit figures. The risk that each shareholder has to bear is determined by the nature of the company's operational activities (“business risk”) and the relationship between equity and debt (“financial risk”).[68] The rational investor demands a risk premium for every riskier investment, which can be taken into account in the shareholder value approach by differentiating the discount rate.

Failure to take the risk into account also leads to problems in managing a company, since all business areas and strategies have to overcome the same investment hurdles regardless of the respective risk level.[69]Günther however, points out the possibility of differentiating accounting key figures by specifying risk-adjusted hurdles ("cut-off rate", e.g. in the form of risk-adjusted capital market costs).[70]

3.2.1.1.4 Neglect of investment requirements

Changes in fixed assets and net current assets are initially not profitable when they are added and only affect profit through their periodization (usually depreciation). Proponents of the shareholder value idea emphasize that such investments are necessary to maintain the company's substance and demand that the liquidity effect of management decisions must be taken into account when determining the company's success. Only then would the financing requirements for future growth be mapped.[71]

3.2.1.1.5 Neglecting economic effects after the observation period

In many cases, expenses or expenses of a period lead to the creation of significant value shares (e.g. establishing a brand name, building up market shares and other competitive advantages).[72] Accounting key figures neglect this residual value. Copeland / Koller / Murrin and Rappaport however, show in two independent studies that the present value of the dividends estimated for the next five years from listed companies is only 10 to 20% of the current market price.[73]

"A company trying to expand its market share and improve its competitive position is likely to push product development, increase marketing spending, adopt an aggressive pricing policy, and invest in expanding production capacity and working capital."[74] All these measures have a negative impact on the accounting result of a company during the periods in which they are taken, although they are aimed at strengthening the strategic position.

3.2.1.1.6 Insufficient correlation with the performance on the capital market

The shortcomings in accounting performance indicators mentioned so far cause Rappaport to the following statement: "Profit growth does not necessarily lead to the creation of economic value for the owners."[75]

In the USA in particular, there is a strong focus on quarterly earnings figures such as earnings per share (EPS). Rappaport has however refuted the thesis that the growth in earnings per share also leads to an increase in the share price.[76] In a study, he found that 172 of Standard & Poor’s 400 companies achieved EPS growth rates of 15% or more between 1974-1979. In 27 (16%) of these, the shareholders achieved a negative total shareholder return (TSR) and in a further 60 companies (35%) the returns on ownership were insufficient to provide an inflation comparison. For the period 1986-1996 the following comparison of the annual growth rates of the EPS and the TSR results for the Standard & Poor’s 500 companies:[77]

Figure not included in this excerpt

Table 2: Earnings per share growth and returns on property in the
Standard & Poor’s 500 Index, 1986-1996[78]

From this and other empirical findings,[79] which come to similar results, the pioneers of the shareholder value idea deduce the unsuitability of accounting success figures as management instruments for the creation of company value.

3.2.1.1.7 Effects of the criticism of “traditional” control parameters

Despite the partially justified criticism of traditional control parameters, above all Günther points out that a number of the problem points can be adequately taken into account by modifying the accounting parameters:[80]

1. Legal leeway in external accounting

By specifying uniform guidelines for the entire group, the distortion caused by scope for assessment and assessment can be eliminated, at least for the assessment of decentralized units. However, comparing different companies remains problematic.

2. Neglect of the time value of money

The time value of money can be taken into account by choosing operating results from cost accounting, since replacement values ​​are usually used as a basis for the valuation.

For the remaining points of criticism (neglect of risk, neglect of investment requirements, neglect of economic effects after the observation period, lack of correlation with the performance on the capital market), there are no adequate adjustments for traditional performance indicators. They require the formation of value-oriented key figures.

3.2.1.2 Fundamental shortcomings in relative accounting profit figures

The realization that profit increases do not automatically correlate with the development of the owner's value led in the 1970s to an increasing spread of profitability indicators, in particular the return on investment (return on total capital) in its various calculation variants and the return on equity.[81] Profitability is the ratio of a period's profit to the capital employed or the assets employed. Relative key figures are seen as more suitable than absolute values ​​for comparing different business areas or companies.[82] However, using an unreliable numerator (e.g., accounting profit) and a denominator that is determined in the same accounting process does not solve the fundamental problem that accounting profit figures are inadequate for determining owner value.[83] After the shortcomings of absolute accounting success parameters outlined above, which of course also flow into the profitability indicators, the specific shortcomings of the relative profit concepts will be dealt with below.

3.2.1.2.1 Return on Investment (ROI)

The return on investment describes the total return on capital, namely the ratio of profit to invested (or tied) capital.

Figure not included in this excerpt

The annual surplus or the overall result before taxes and interest on borrowed capital is usually used as the accounting profit variable.[84]

The triumphant advance of ROI as a control instrument in practice is inseparable from DuPont -Company connected. Donaldson Brown In 1912, as the company's chief financial officer, he carried out the following breakdown of the rate of return by definition:

Figure not included in this excerpt

The basic parameters profit, turnover and capital that appear in it can each be further broken down. For example, the capital can be broken down into fixed and current assets of the various areas and sales can be differentiated according to the individual areas. Similarly, profit can be broken down by area and further broken down according to aspects such as contribution margins, fixed costs, etc. This decomposition is also called DuPont -Scheme called.[85]

Already in 1966 Solomon Systematic differences between accounting returns - based on the return on investment (ROI) - and “real” economic returns - measured as the internal interest rate - are determined in an analytical way.[86] He comes to the conclusion that the ROI generally overestimates the “real” returns. The deviation is neither constant nor consistent in its direction, i.e. there is no systematic error pattern that allows error correction. As a rule, however, the ROI overestimates the economic returns. The main influencing factors are:[87]

- Lifespan of a project: The longer the project duration, the greater the overestimation.
- Capitalization policy: The smaller the share of capitalized capital expenditure, the greater the overestimation.
- Depreciation period: The faster the investments are written off (e.g. declining balance depreciation), the greater the overestimation.
- Time lag between capital expenditures and returns: the greater the lag, the greater the overestimation.
- Company growth: The overestimation is lower for fast growing companies than for non-growing companies.
- inflation: The higher the inflation rate, the greater the overestimation.

Despite the tendency to overestimate real returns, ROI has been criticized for its inherent underinvestment incentive.[88] The following example illustrates this.

ROI underinvestment incentive

Given division A with an annual surplus of 200 and invested capital of 1,000. This results in an ROI of 20%. The cost of capital is 10%. An investment of 100 is up for discussion, which would increase the net income by 15. The ROI of this investment is 15% above the cost of capital of 10%. With the new investment, the total ROI is calculated as follows:

Figure not included in this excerpt

Since the ROI of division A sinks through the investment, the management is motivated to refrain from investing, although a positive value contribution would be made for the company because the return is higher than the cost of capital.

Example 1: ROI underinvestment incentive

Kaplan / Atkinson point out that this problem always arises when the performance of a business area is evaluated with a ratio.[89] Management can maximize the ratio either by increasing the numerator (i.e. increasing profits with the same capital base) or by lowering the denominator (i.e. constant profits with falling capital base). Thus, any investment with a return below the average ROI is a potential candidate for disinvestment or non-investment. Investors with a long-term orientation suffer from underinvestment a loss in value of their share equal to the capital value of the investments not made.[90]

If the annual surplus is used as the numerator for calculating the ROI, the capital structure selected has an influence on the level of the key figure. Since interest on borrowed capital is taken into account in the annual surplus to reduce profits, the shift from debt to equity capital can lower the interest expense and thereby increase the annual surplus.[91] The manipulability of relative, accounting profit figures through financing decisions becomes even clearer when discussing return on equity.

3.2.1.2.2 Return on Equity (ROE)

The return on equity (ROE) is generally defined as the quotient of profit and book value of equity:

Figure not included in this excerpt

In addition to the deficiencies already outlined in the ROI, the ROE criticizes its ability to be influenced by financial policy decisions.[92] This possibility of influencing can be made clear when the ROE is broken down into the following components:[93]

Figure not included in this excerpt

The factors that cause an increase in the return on equity are an increase in profit margin, an increase in asset turnover and an increase in the proportion of debt. As a result, it is difficult to judge in retrospect whether an increase in ROE is due to an improvement in the company's economic performance or to higher debt. In addition, when nominal values ​​are used, inflation leads to an increase in the rate of asset turnover.[94]

Hergert In 1983, based on an analysis of Standard & Poor’s 400 industrial companies, showed that despite a decline in return on sales in the 1970s, an increase in return on equity could be achieved through a significant increase in the turnover of assets and the level of debt.[95] The considerable inflation in the period under review was reflected more quickly in sales than in total assets, which consist of assets from different acquisition times, which may be posted at a maximum of their (nominal) acquisition costs. Especially for capital-intensive companies, the statement applies that an increase in the turnover of assets is more likely to be attributed to inflation than to a better use of assets.[96]

In this context, however, the incentive problem that can result from the influence of the financial leverage effect on the ROE appears to be far more important. A risk-neutral or risk-averse manager who strives for the highest possible return on equity will choose high levels of debt financing if the expected return on capital is higher than the interest rate on debt. If the leverage effect is active, this leads to an increase in the ROE. However, this increase must be weighed against the increase in the financial risk and the resulting impact on the company's value.[97]

3.2.2 Further pioneers of the shareholder value approach

Based on Günther[98] Other reasons for the rapid spread of enterprise value-oriented corporate management can be seen in the following aspects in particular:

3.2.2.1 The wave of mergers and acquisitions

The global wave of takeovers in the second half of the 1980s promoted the spread of the shareholder value approach in several ways. Empirical studies show that up to 50% of company takeovers can be classified as failures.[99] These high failure rates have resulted in methodological problems of the valuation of acquisitions, in the sense of a search for the “true value” of an acquisition candidate.

However, these flops must be contrasted with the extremely successful takeovers, which have shown that there are often considerable differences between the current value of a company[100] and the value that can be achieved after a restructuring was discovered (Value gaps). The takeover of the food company is an example of this RJR Nabisco by the investment bankers Kohlberg Kravis Robert & Co. listed in 1988. These value gaps can be traced back to over-optimism on the part of buyers or third parties, to sub-optimal decisions by management or to inadequate information for evaluation or inefficient information processing.[101]

[...]



[1] See Schüler (1998), p. 1

[2] See Rappaport (1986)

[3] See Günther (1997), p. 1

[4] See Günther (1997), p. 1

[5] See Marizzi (2000), p. 5

[6] Economic Value Added and EVA are registered trademarks of Stern Stewart & Co.

[7] Ittner / Larcker (1998), p. 205

[8] See Schüler (1998), p. 19

[9] See Riedl (2000), p. 16

[10] See Hoffmann (2000), p. 7

[11] The terms “performance” and “performance” as well as “performance measurement” and “performance measurement” are used synonymously in this work.

[12] See Mellerowicz (1963), p. 188; Engelhardt (1966), p. 159, in: Gleich (2001), p. 36

[13] See Riedl (2000), p. 16

[14] See Ewert / Wagenhofer (2000b), p. 5

[15] See Hoffmann (2000), p. 8

[16] See Riedl (2000), p. 17

[17] See Riedl (2000), p. 17

[18] See, for example, Riedl (2000), p. 30; Gleich (2001), p. 21

[19] See Riedl (2000), p. 30

[20] For coordination problems see Ewert / Wagenhofer (2000b), p. 446ff.

[21] See Pfaff / Bärtl (1999), p. 88

[22] See Hoffmann (2000), p. 8

[23] See Hoffmann (2000), p. 10f.

[24] See Lebas (1995), p. 24

[25] See Hoffmann (2000), p. 11

[26] See Kaplan / Atkinson (1998), p. 442

[27] See Klingebiel (2000), p. 3

[28] See Riedl (1998), p. 19

[29] See Riedl (200), p. 19

[30] See Riedl (2000), p. 20; similar, with regard to the term “key figure”: Reichmann (1995), p. 19; Weber (1998), p. 197

[31] See Ittner / Larcker (1998), pp. 217ff.

[32] See Kaplan / Norton (1996)

[33] See Kaplan / Atkinson (1998), p. 442

[34] See Reichmann (1995), p. 21; Horváth (1996), p. 545; Gladen (2001), p. 15f.

[35] See Hoffmann (1999), p. 12; Riedl (2000), p. 22f.

[36] See Franke / Hax (1990), p.102f.

[37] See Hoffmann (1999), p. 13ff.

[38] See Pfaff (1994), pp. 1068f.

[39] Günther (1997), p. 2

[40] See Rappaport (1999), p. 69

[41] See Lorson (1999), p. 1329

[42] See Pfaff / Bartl (1999), p 87

[43] See Lorson (1999), p. 1329; Hoffmann / Wüest (1998), p. 187

[44] See Lorson (1997), p. 168

[45] Lorson (1999), p. 1329

[46] See Günther (1997), p. 50

[47] See Heinen (1991), pp. 19f.

[48] See Heinen (1991), p. 17

[49] See, inter alia, Rappaport (1995), pp. 19-45; Stewart (1990), pp. 22-56; Copeland / Koller / Murrin (1991), pp. 73-95

[50] See Lorson (1999), p. 1330

[51] See Rappaport (1995), p. 19; Bischoff (1994), p. 11

[52] See Bischoff (1994), p. 13

[53] See Günther (1997), pp. 54ff .; Rappaport (1998), pp. 20ff .; Bischoff (1994), p. 26ff.

[54] See Günther (1997), p. 55; Bischoff (1994), p. 32f.

[55] Franke / Hax (1990), p. 32

[56] See Küting / Weber (1987)

[57] Baden (1992), p. 138

[58] See Bischoff (1994), p. 27

[59] See, e.g., Rappaport (1998); P. 45f .; Günther (1997), 54

[60] See Bischoff (1994), pp. 27f.

[61] See Bischoff (1994), p. 33

[62] Commercial Code (HGB) of May 10, 1897

[63] US Generally Accepted Accounting Principles

[64] International Accounting Standards, published by the "International Accounting Standards Committee", to which 153 representatives from 112 countries belong (for Austria: Chamber of Public Accountants and Institute of Austrian Public Auditors)

[65] See Kaplan / Atkinson (1998), p. 514

[66] See Rappaport (1995), pp. 27f .; Bischoff (1994), p. 16f.

[67] See Rappaport (1995), p. 27

[68] See Rappaport (1995), p. 21

[69] See Günther (1997), p. 55

[70] See Günther (1997), p. 55

[71] See Günther (1997), p. 57f .; Rappaport (1995), p. 23ff.

[72] See Günther (1997), p. 58

[73] See Copeland / Koller / Murrin, pp. 88f .; Rappaport (1995), p. 41f.

[74] Rappaport (1995), p. 42

[75] Rappaport (1995), p. 28

[76] See Rappaport (1995), p. 31

[77] See Rappaport (1998), p. 21

[78] Standard & Poor’s and Stocks, Bonds, Bills, and Inflation-1997 Yearbook (Chicago: Ibbotson Associates, 1997)

[79] See Lewis / Stelter (1993), p. 111; Copeland et al. (1991), p. 85

[80] See Günther (1997), pp. 211ff.

[81] See Rappaport (1995), p. 32

[82] See Ewert / Wagenhofer (2000b), p. 542

[83] See Rappaport (1995), p. 32

[84] See Bühner (1990), p. 26

[85] See Ewert / Wagenhofer (2000b), p. 544

[86] See Solomon (1969), p. 232ff., In: Günther (1997), p. 53

[87] See Solomon (1966), p. 239f., In: Günther (1997), p. 53; see also Rappaport (1995), p. 34f.

[88] See Bischoff (1994), pp. 35ff .; Kaplan / Atkinson (1998), p. 505f .; Ewert / Wagenhofer (2000b), p. 543f.

[89] See Kaplan / Atkinson (1998), p. 506

[90] See Bischoff (1994), p. 37

[91] See Bischoff (1994), p. 35

[92] See Bischoff (1994), p. 37ff .; Rappaport (1995), p. 43ff.

[93] See Hergert (1983), p. 101, in: Rappaport (1995); P. 44; Günther (1997), p. 55f .; Bischoff (1994), p. 38

[94] See Bischoff (1994), p. 38ff .; Rappaport (1995), pp. 44f .; Günther (1997), p. 55

[95] See Hergert (1983), p. 101, in: Rappaport (1995), p. 44; Günther (1997), p. 55

[96] See Rappaport (1995), p. 45

[97] See Bischoff (1994), p. 38ff .; Rappaport (1995), p. 45

[98] See Günther (1997), p. 5ff.

[99] See Porter (1987), pp. 43ff .; Coley / Reinton (1988), p. 29f .; Möller (1983), p. 61ff. and Gerpott (1993), p. 399ff.

[100] In the case of listed companies, the current company value is the market value plus the market value of the borrowed capital; in the case of non-listed companies, the company should be valued “as it stands”.

[101] See Günther (1997), p. 10ff.

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