Value Based Management

Question 1

VBM

Answer 1

VBM measures are expected to solve the problem associated with accounting measures by accounting for the cost of capital

Question 2

VBM Measures

Answer 2

Residual income 
Economic Value added
Shareholder value analysis
Return on invested Capital 
Discounted Cash flow

Question 3

Ryan and Trahan (2007) (Effectiveness of VBM)

Answer 3

Studied the performance of 84 firms which adopted VBM over the period 1984-1997.

• Firms reduced capital expenditure following VBM, improving the efficient use of capital.
• Large firms show less improvement then smaller firms.
• The typical firm significantly improved adjusted residual income after adopting VBM.

Question 4

Malmi and Ikaheimo (2003)

Answer 4

• Use of VBM measures did not lead to abandoning traditional financial measures
• VBM measures did not completely align shareholders and managers interest.

Question 5

Factors Affecting the Use of VBM

Answer 5

1) Firms strategic importance to use assets intensively
2) The influence that managers have on VB performance
3) Delegation of strategic & operational decision rights
4) Unit interdependence
5) Industry, firm size, CFO and their educational background.