A comparison of management performance measures
Year: 2013
Type: dissertation
Abstract: Purpose: The purpose is to choose from previous research relevant key ratios and performance measures which lend themselves as a basis for management performance evaluation. After selection, we will further analyze the statistical relationships between the measures and their influence on stock price, using a shareholder perspective. In addition, examine weather it is beneficial to combine market and accounting based measures in this regard. Background: The separation of ownership and management which follows naturally by the adoption of joint-stock company corporate structure creates a problem of aligning management‟s self interest with that of the shareholders. The gap is often bridged using compensation packages, which needs to be tied to some form of accounting related performance measure that needs to provide some form of basic relation with shareholder value. Frame of Reference: Works by Jensen and Meckling (1976) regarding agency theory and additional theories regarding stakeholder theory, motivation and incentive theory are used to provide a solid background. In addition works by scholars such as Arabsalehi and Mahmoodi (2011) and Bacidore, Boquist, Milbourn and Thakor (1997) constitute the main framework which guides this thesis. The performance measures included were return on equity (ROE), return on assets (ROA), return on capital employed (ROCE), return on sales (ROS), economic value added (EVA) and shareholder value added (SVA). Method: In order to address the purpose, a deductive research approach is used. Secondary data is collected and analysed using several statistical tests such as, panel data tests, correlation tests and coefficient of determination. Linear as well as non-parametric correlation tests were conducted. The regressions were conducted single and pairwise with and without control variables. The most suitable panel data model were selected out of three possible: fixed effects model, random effects model and pooled OLS model. The panel data model were selected using Doughtery‟s (2007) panel data selection model as a basis. Conclusion: EVA, ROCE and ROA showed evidence of being more appropriate measures based on predictionand explanatory power. SVA, although correlating with shareholder wealth at a statistically significant level, were not equally convincing as EVA, ROCE and ROA. Neither ROE or ROS showed evidence of having statistically significant relationships with changes in shareholder wealth, regardless of statistical model. Pairwise combination tests with one accounting based and one market based measure did not increase the explanatory power in shareholder value creation compared to using only a single performance measure.
Authors: Andreas Jivsäter, Marcus Martinsson
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W595818794