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Recognizing Macroeconomic Fluctuations in Value Based Management

Author

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  • Oxelheim, Lars

    (The Research Institute of Industrial Economics)

  • Wihlborg, Clas

    (Copenhagen Business School)

Abstract

Value Based Management (VBM) has become a common tool for ex ante and ex post evaluation of corporate strategies and projects from the perspective of shareholder value maximization (SVM). VBM-frameworks are designed to support investment and divestment decisions, ex post evaluation of management and their major strategic decisions, and bonus-systems. Traditional VBM frameworks make no distinction between sources of temporary changes in performance, and sources of performance reflecting the intrinsic competitiveness of the firm. Temporary changes in performance are often caused by macroeconomic fluctuations. In this article we develop an approach for “filtering” the impact of macroeconomic fluctuations out of measures of performance in order for management to obtain better information for purposes of investment, divestment, and exposure management decisions. We focus on filtering for purposes of performance assessment employed in compensation schemes. A case study illustrates the approach, and shows the potential magnitude of effects from macroeconomic events.

Suggested Citation

  • Oxelheim, Lars & Wihlborg, Clas, 2002. "Recognizing Macroeconomic Fluctuations in Value Based Management," Working Paper Series 574, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:0574
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    File URL: https://www.ifn.se/Wfiles/wp/WP574.pdf
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    References listed on IDEAS

    as
    1. Lars Oxelheim & Clas Wihlborg, 1995. "Measuring macroeconomic exposure: The case of Volvo Cars," European Financial Management, European Financial Management Association, vol. 1(3), pages 241-263, November.
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    Cited by:

    1. Bartram, Söhnke M., 2008. "What lies beneath: Foreign exchange rate exposure, hedging and cash flows," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1508-1521, August.
    2. Oxelheim, Lars & Wihlborg, Clas & Zhang, Jianhoa, 2008. "Executive Compensation and Macroeconomic Fluctuations," Working Paper Series 746, Research Institute of Industrial Economics.
    3. Joseph Calandro, 2006. "Accident Year Development, Bonus Banks, and Insurance Incentive Compensation," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 9(2), pages 205-217, September.
    4. Lee, Seul Ki & Jang, SooCheong (Shawn), 2011. "Foreign exchange exposure of US tourism-related firms," Tourism Management, Elsevier, vol. 32(4), pages 934-948.
    5. Andrén, Niclas & Oxelheim, Lars, 2002. "Exchange-Rate and Interest-Rate Driven Competitive Advantages in the EMU," Working Paper Series 576, Research Institute of Industrial Economics.

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    More about this item

    Keywords

    Value Based Management (VBM); Shareholder Value Analysis (SVA); Economic Value Added (EVA); Performance Measurement; Macroeconomic Fluctuations; Bonus System;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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