Advanced

Recognizing Macroeconomic Fluctuations in Value Based Management

Oxelheim, Lars LU and Wihlborg, Clas (2003) In Journal of Applied Corporate Finance 15(4). p.104-110
Abstract
Value Based Management (VBM) has become a common tool for evaluating corporate strategies and projects from the perspective of shareholder value maximization, and can be an important input for corporate compensation systems. But traditional VBM frameworks make no systematic effort to distinguish between changes in performance attributable to macroeconomic fluctuations beyond management's control and changes in performance that reflect the intrinsic competitive position of the firm.



The authors have developed an approach for “filtering out” the impact of macroeconomic fluctuations on cash flows for purposes of performance evaluation. Such fluctuations are captured by changes in exchange rates, interest rates, and... (More)
Value Based Management (VBM) has become a common tool for evaluating corporate strategies and projects from the perspective of shareholder value maximization, and can be an important input for corporate compensation systems. But traditional VBM frameworks make no systematic effort to distinguish between changes in performance attributable to macroeconomic fluctuations beyond management's control and changes in performance that reflect the intrinsic competitive position of the firm.



The authors have developed an approach for “filtering out” the impact of macroeconomic fluctuations on cash flows for purposes of performance evaluation. Such fluctuations are captured by changes in exchange rates, interest rates, and aggregate price levels (both domestically and abroad) that are significantly correlated with a particular company's cash flows. The authors also provide a method for distinguishing between expected and unanticipated cash flow effects of macro events and recommend insulating managers' performance only from the changes they cannot anticipate and manage. In applying the framework to Electrolux, a Swedish multinational, the authors show that unanticipated changes in the krona/pound exchange rate and various interest rates contribute significantly to the variability of the firm's cash flows; and with the help of the sensitivity coefficients used to measure such exposures, they calculate measures of “intrinsic” cash flow that are purged of such macro effects. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Journal of Applied Corporate Finance
volume
15
issue
4
pages
104 - 110
publisher
John Wiley & Sons
ISSN
1745-6622
DOI
10.1111/j.1745-6622.2003.tb00531.x
language
English
LU publication?
yes
id
56e0b14a-e903-4725-850e-67cd3ece13c4 (old id 1387824)
date added to LUP
2009-04-20 12:27:27
date last changed
2018-05-29 11:24:53
@article{56e0b14a-e903-4725-850e-67cd3ece13c4,
  abstract     = {Value Based Management (VBM) has become a common tool for evaluating corporate strategies and projects from the perspective of shareholder value maximization, and can be an important input for corporate compensation systems. But traditional VBM frameworks make no systematic effort to distinguish between changes in performance attributable to macroeconomic fluctuations beyond management's control and changes in performance that reflect the intrinsic competitive position of the firm.<br/><br>
<br/><br>
The authors have developed an approach for “filtering out” the impact of macroeconomic fluctuations on cash flows for purposes of performance evaluation. Such fluctuations are captured by changes in exchange rates, interest rates, and aggregate price levels (both domestically and abroad) that are significantly correlated with a particular company's cash flows. The authors also provide a method for distinguishing between expected and unanticipated cash flow effects of macro events and recommend insulating managers' performance only from the changes they cannot anticipate and manage. In applying the framework to Electrolux, a Swedish multinational, the authors show that unanticipated changes in the krona/pound exchange rate and various interest rates contribute significantly to the variability of the firm's cash flows; and with the help of the sensitivity coefficients used to measure such exposures, they calculate measures of “intrinsic” cash flow that are purged of such macro effects.},
  author       = {Oxelheim, Lars and Wihlborg, Clas},
  issn         = {1745-6622},
  language     = {eng},
  number       = {4},
  pages        = {104--110},
  publisher    = {John Wiley & Sons},
  series       = {Journal of Applied Corporate Finance},
  title        = {Recognizing Macroeconomic Fluctuations in Value Based Management},
  url          = {http://dx.doi.org/10.1111/j.1745-6622.2003.tb00531.x},
  volume       = {15},
  year         = {2003},
}