Recognizing Macroeconomic Fluctuations in Value Based Management

Recognizing Macroeconomic Fluctuations in Value Based Management

Article Summary

Recognizing Macroeconomic Fluctuations in Value Based Management by Lars Oxelheim and Clas Wihlborg is about Value Based Management (VBM) having 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 Oxelheim and Wihlborg 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.

Oxelheim and Wihlborg 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.