Value based performance measures: theoretical evaluation and empirical analysis of their application and value relevance on a european level
- Autores: Nils Eikelmann
- Directores de la Tesis: C Roland Wolf (dir. tes.), Ángel Meseguer Martínez (dir. tes.)
- Lectura: En la Universidad Católica San Antonio de Murcia ( España ) en 2018
- Idioma: español
- Tribunal Calificador de la Tesis: Martin Quinn (presid.), Raúl Baños Navarro (secret.), Stefan Thode (voc.)
- Programa de doctorado: Programa de Doctorado en Ciencias Sociales por la Universidad Católica San Antonio
- Materias:
- Enlaces
- Resumen
Companies’ actions are determined by VBM and Shareholder Value approach. Thus, they strive to earn a profit which covers the total cost of capital. The costs of capital play an important role as they are the hurdle rate for companies.2111 The widely used method of CAPM for cost of capital calculation is controversially discussed in the scientific literature and shows some flaws in its practical application.
Due to the separation of ownership and control the Shareholder Value maximation is the primary goal of companies. The Principal Agent Theory is used to describe the behaviour of managers and shareholders under these circumstances. Both parties act opportunistically and due to information asymmetries managers can harm shareholders. In order to reduce information asymmetries and limit opportunistic behaviour monitoring, screening, selfselection, incentive systems and control systems are possible solutions. In this context key figures are an instrument as they help to reduce agency problems before and during an investment. They can be used for monitoring and controlling the actions of managers. The voluntary publication of value based performance measures can be seen as a signal in order to increase trust into mangement’s abilities and behaviour. Key figures are also part of control and incentive systems within a company.
Beside the relationship between managers and shareholders it is important to point out how the capital market processes information. The theory of efficient capital markets stresses that the delivery of information plays an important role as the efficiency of a capital market is determined by the information contained in prices. It can be assumed that capital markets are regularly nearly semi-efficient.
Thus, the prices contain mostly all public available information but can be distorted by capital market anomalies or the behaviour of individuals. The accounting of companies is an important part for price setting on capital markets as it contains reliable information for investors about a companies’ performance.
The analysis of information needs of the most important actors on capital markets confirms the important role of accounting. Most relevant information sources for investors are personal contacts to management and the annual accounts published by a company. Key figures summarise the information contained in annual accounts and are used in the context of fundamental analysis which many professional investors conduct. Analysts also use key figures for performance analysis, rating agencies for an assessment of creditworthiness. For private investors key figures play a minor important role. Taking insights from Principal Agent Theory, theory of efficient capital markets and analysis of information sources of capital market participants together accounting fulfils a stewardship role, is a common basis for investment decisions and thus is an important part of information which influences price formation on capital markets.
The annual accounts are set up on the basis of IFRS rules. IFRS accounting rules focus on equity and debt capital providers. They strive to provide the addressees with decision-useful information. Despite several advantages and an overwhelming objective which corresponds to the objectives of VBM and Shareholder Value approach, the legal reporting is not sufficient to satisfy comprehensively the information needs of investors.
Therefore, companies often give voluntarily additional information to their capital providers. This behaviour is summarised under the term Value Reporting which has the objectives to adapt the stock price to the intrinsic value as well as to reduce information asymmetries between the company and investors and creditors. Reduction of information asymmetries leads to decreasing costs of capital.
Key figures are an important part of Value Reporting. They document and summarise the performance of a company. Especially value based performance measures play an important role because they are able to give shareholders an indication about the success of a company in a period on the basis of the Shareholder Value approach.
The latest initiative is the integrated reporting framework which strives to create a standardised and summarised report containing the most important information. In this context key figures also play an important role for delivering summarised information to recipients of integrated reports. The following illustration summarises in simplified terms the framework conditions for the application of value based management.
In the context of the framework conditions illustrated companies use and disclose information about traditional key figures like PER, EPS, ROE, ROS or ROI. Independent from individual strength and weaknesses of these key figures, traditional key figures do not include the cost of capital in their calculation. Due to the occurring dissatisfaction with traditional key figures value based performance measures have been developed. These key figures have the objective to reduce the flaws of traditional key figures, e.g. no consideration of cost of equity capital, many possibilities for manipulation or low correlation with the developments at capital markets.
Value based performance measure can be classified with the help of three criteria: Data basis, time horizon and type of key figure. They can be calculated on the basis of earnings or Cash Flows. Independent from the data basis is the focus of a key figure. It can assess the performance of a single period or of the total period. The criterion type of key figure includes the differentiation between absolute and relative numbers.
The theoretical justification for using value based performance measures equally to key figures which base on earnings is the concept of residual income. This concept shows that under certain circumstances present values calculated on earnings and Cash Flows lead to identical results.
In the context of this dissertation the value based performance measures ROCE Spread, EVA, CFROI, CVA, DCF and MVA have been presented and assessed on the basis of theoretical criteria. Value based performance measures focussing on a single period mostly do not fulfil the requirements which scientific literature postulates and which results from the point of criticism of traditional key figures. These key figures also have many of flaws of traditional key figures. The key figures DCF and MVA fulfil many of the assessment criteria but their main disadvantages are that they are not the appropriate key figures to assess the performance of a single period and that the effort for calculation is very high.
The analysis of the current state of research as a supplement to the theoretical assessment of the value concepts has two dimensions: Firstly, the question how many companies disclose information about value based performance measures and secondly, what is the determined coherence between these key figures and stock prices. The analysis of empirical studies with focus on the first question reveals that the number of companies disclosing information about value based performance measures has been increased but that the theoretical concepts have been simplified in practice. Concerning the second focal point of the analysis, the value relevance of value based performance measures in comparison to traditional key figures, leads to the insight that a superior key figure cannot be determined and that partly the results of studies are contradicting.
On the basis of the current status of research and identified problems respectively research gaps the empirical study of this dissertation is divided in three parts: Analysis of annual reports on a European level for determining the application rate of value based performance measures, standardised calculation of a value based performance measure and a value relevance study for comparing the value relevance of the standardized value based performance measure with traditional key figures.
The data basis for the first part are annual reports of companies contained in the index Stoxx Europe 600 in the period 2012 – 2015. They are analysed and assessed with a ranking scheme. So far, empirical studies which analyse the disclosure behaviour on a cross-national basis are rare. Most of the studies focus on single countries.
In total, 2,384 annual reports are assessed. The application throughout Europe is relatively low and fluctuates between 11 % and 13 %. The majority of companies does not give any information about value based based performance measures. Companies which mention a value based performance measure regularly provide the reader with accompanying information. In total, the number of companies which disclose their value concept in the annual report slightly decreases in the investigation period.
Most striking is the difference of the application rate of value based performance measures between Germany and the rest of Europe. A possible explanation could be the high significance of the topic within the German scientific community. Also the methodology could be a cause for the difference. Another method, e.g. interview with managers, could lead to higher application rates in other countries. Apart from this peculiarity it can be summarised that it is surprising how many companies do not provide the reader of annual reports with information about a value based performance measure.2134 A short overview of the results of the first part of the study is given in the illustration below.
The analysis of current state of research in combination with the theoretical assessment of value concepts reveal that the number of value based performance measures out of which companies can select is very high and that companies adapt the calculation to their individual needs. In order to be able to compare the performance of companies independently from size, the ROCE Spread and ROE Spread are computed for the period 2012 – 2016.2135 The posed research question and corresponding answer is illustrated below.
The analysis shows that the majority of companies in the sample are able to generate a profit above the hurdle rate of the cost of capital. However, many companies have a profit which is only slightly above their cost of capital. By analysing the top performers within the investigation period, five companies are part of this group every year. The companies with lowest ROCE Spread are often banks or financial institutions.
These results indicate that many companies act in markets with strong competition because they have hurdle rates slightly above zero. In contrast, the top performing companies probably act in markets with less strong competition.
The last part of the study is a value relevance analysis in the form of an association study. Despite several empirical studies a superior key figure cannot be determined. Many of these studies focus on Anglo American markets or deal with the EVA. Furthermore, the study is conducted in a unique economic environment due to the period of low interest rates in Europe. It deals with the question what is the relative information content of the Value Added as an example for a value based performance measure in comparison to common traditional figures EPS, PER, ROI, ROE and ROS. The used regression equation is an equation based on the price level approach and derived from the Feltham Ohlson model.
The results show that the regression equation with the value based performance measure Value Added and the traditional key figure EPS have the highest coefficient of determination. The other traditional key figures have R² below the R² of Value Added and EPS. The illustration below contains a short overview of the most important results.
In comparison to previous studies the difference between traditional key figures and value based performance measures is lower and partly reverse. Reasons for diverging results could be the continuous dissemination of VBM and Shareholder Value approach which fosters the value relevance of key figures like Value Added. The high value relevance of EPS can be explained with the focus of all capital market participants on earnings. In total, the value relevance analysis confirms the results of previous studies and a uniform superior key figure cannot be determined.
