Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 574: Recognizing Macroeconomic Fluctuations in Value Based Management

Lars Oxelheim () and Clas Wihlborg ()
Additional contact information
Lars Oxelheim: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Clas Wihlborg: Copenhagen Business School, Postal: Department of Finance, Sjolbjerg Plads 3, DK-2000 Fredriksberg, Denmark, and Department of Economics, School of Economics and Commercial Law, Göteborg University, P.O. Box 640, SE-405 30 Göteborg, Sweden

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.

Keywords: Value Based Management (VBM); Shareholder Value Analysis (SVA); Economic Value Added (EVA); Performance Measurement; Macroeconomic Fluctuations; Bonus System

JEL-codes: D81; G31

21 pages, February 8, 2002

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