Financial Performance Measures and Value Creation: the State of the Art

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 rewarding managers.
Corporate financial performance, measured in terms of accounting-based ratios, has been viewed as inadequate, as firms began focusing on shareholder value as the primary long-term objective of the organization.
Corporate managers have been facing a period in which a new framework that better reflects value creation and economic profitability had to be implemented in their companies. The increased efficiency of capital markets required that capital allocation within companies would become more efficient: a value-based management framework, better reflecting opportunities and pitfalls, was therefore necessary. Subsequently, value metrics were devised that explicitly acknowledged that both equity and debt have costs, and thus emerged the need of incorporating financing risk-return into performance calculations.

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 primary long-term objective of the organization. Hence, value-based metrics were devised that explicitly incorporate the cost of capital into performance calculations. Despite the increasing emphasis on these value-based measures, no definitive evidence exists of which metric works better than others, and on the extent to which any of them is superior to traditional accounting measures. In this scenario, the objective of this book is contributing to the ongoing dialogue on the appropriateness of different financial performance measures, by providing a systematic and updated review of the major value-based measures, by highlighting their respective strengths and weaknesses and by comparing the main international empirical evidence on theireffectiveness. This book can be a powerful tool for guiding managers and graduate students in the tangled forest of the existing metrics, by providing them with the quick, but adequate knowledge for consistently adopting them.

Includes a systematic comparison of the main value-based metrics by different perspectives Summarizes the most important empirical evidence emerging from the international literature about financial metrics' effectiveness Includes in a brief and quick book the comparison of the main value-based measures Includes supplementary material: sn.pub/extras

Inhalt

Introduction.- Criticism of the accounting-based measures of performance.- Competing financial performance measures. The metrics war.- Concluding remarks: strengths and weaknesses of the economic value measures. Appendices.- References.