Anda di halaman 1dari 2

CHAPTER 10: FINANCIAL PERFORMANCE MEASURES AND THEIR EFFECTS

Primary objective of for-profit firm is to maximize shareholder value or firm value, which
is a long-term, future-oriented concept.
Summary
Measures
1. Market
Measures that reflect
Financial performance measures
measures
changes in stock prices - Denominated in currency (eg. Quarterly
or shareholder returns
profits of $19.2m)
- Ratio of financial numbers (eg. $0.12
2. Accounting
Residual terms: Net
EPS or ROE)
measures
income after taxes,
operating profit, residual - Change in financial numbers (eg. 11%
earnings growth)
income, EVA
Ratio terms: ROI, ROE,
ROA(net assets)
3. Combinations Involve the use of either Evaluation criteria for all summary
of measures
tupe of summary
measures:
measures , or both, plus - Congruence
- Controllability
some disaggregated
financial measures (eg - Precision
- Objectivity
revenue, expenses)
- Timeliness
and/or nonfinancial
- Understandability
measures (eg. Market
- Cost efficiency
share, customer
*Net benefits greater than other
satisfaction , employee
alternatives
turnover)
Market Measures
Why accounting measures are in such common use? What are some
disadvantages?
- At minimal incremental cost, they provide a useful summary of the results of the
many actions and decisions that managers take.
- However, even the best accounting measures are not perfect; they are only
surrogate or proxy indicators of changes in firm value.
iii. One most significant problem is it causes a tendency to make managers excessively
short-term oriented, or myopic.
iv. Use of accounting-based ROI-type (ratio or return) measures
Advantage
- Conceptual weaknesses of ROI are well understood
- Potential suboptimization problems can be avoided or mitigated
to some extent through the investment review processes, as well
as through their inherent self-disciplining systems with some
degree of effectiveness.
- Managers of highly profitable divisions can be encouraged to
make more investments
- Proposed investments from less profitable divisions can be
scrutinized carefully.
- Even the managers evaluated by ROI-type measures should
understand that when they run down their business by not
investing in it or by not replacing their old assets, this will
eventually hamper their ability to generate revenues from these
assets, thereby hurting the numerator of their ROI measure
assuming that they plan to be around long enough in the
company for that to be a worry for them.

CHAPTER 10: FINANCIAL PERFORMANCE MEASURES AND THEIR EFFECTS

Disadvanta
ge

Cause suboptimization, a form of behavioural displacement

Anda mungkin juga menyukai