An analysis of dysfunctions and biases in financial performance measures

Britzelmaier, Bernd; Schlegel, Dennis

doi:10.1504/gber.2011.041853

Cited by 1 publication

(7 citation statements)

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“…Standard financial theory suggested calculating the overall cost-of-capital as a weighted average of the cost of using the different capital sources relative to the percentage usage of each source (Britzelmaier 2013;Ionici et al 2011 Arnold 2008) concept is referred to as the Weighted Average Cost-of-capital (WACC). The calculation formula is shown below.…”

Section: The Business Firm Perspectivementioning

confidence: 99%

“…In value-based management concepts, residual income measures or economic profit measures are used that subtract the cost-of-capital from profit (Britzelmaier 2013;Dempsey 2013). The idea behind this concept is that a company only creates value if the profit exceeds the cost-of-capital (Wahlen et al 2011;Britzelmaier 2009).…”

Section: Performance Measurement and Value-based Managementmentioning

confidence: 99%

“…In a first step, the CFROI, which is a cash flow based return measure, is calculated based on a formula similar to an Internal Rate of Return (IRR) calculation. In a second step, this return is contrasted with the cost-of-capital (WACC) in order to calculate the Cash Value Added (CVA), which is an economic profit measure (Britzelmaier 2013). Above, it was shown that although there are different value-based measures, the cost-of-capital (WACC) is an important element in all of the main concepts.…”

Section: Performance Measurement and Value-based Managementmentioning

confidence: 99%

“…For a detailed discussion of the EVA and the CFROI, including a sensitivity analysis of the two measures, see Erasmus and Lambrechts (2006). For a more technical discussion of financial measures, including EVA, see Britzelmaier and Schlegel (2011).…”

Section: Performance Measurement and Value-based Managementmentioning

confidence: 99%

“…is likely to misuse the delegated authority for his own benefit. Second, the agent is able to enforce his own interests, since there is information asymmetry in favour of the agent (Britzelmaier 2013;Weber and Schäffer 2006). This creates a reduction of the principal's welfare, which can be classified as different types of agency costs (Jensen and Meckling 1976).…”

Section: Agency Theory and Managerial Financementioning

confidence: 99%

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Background: Cost-of-Capital in the Finance Literature

Schlegel¹

2015

Contributions to Management Science

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The literature review in this thesis is distributed over two chapters. The aim of Chap. 2 is to discuss literature from the field of cost-of-capital. This is necessary as a foundation for the subsequent chapter, which is more application-oriented. In Chap. 3, previous empirical results on companies' cost-of-capital practices are discussed. Research gaps will be identified at the end of that chapter.This chapter is structured as follows: In Sect. 2.1, the broader field of company cost-of-capital is discussed. This includes a brief discussion of traditional seminal papers as a foundation for the rest of the literature review as well as a review of contemporary discussions about general issues of cost-of-capital, such as alternative determination models and the consideration of unsystematic risk. Section 2.2 shows how the field of cost-of-capital relates to the different sub-disciplines of Finance and for which fields of application of Managerial Finance it is relevant. In particular, the role of cost-of-capital in internal capital allocation, performance measurement and value-based management is discussed. In Sect. 2.3, a theoretical framework for the determination of cost-of-capital in a company group context that is derived from traditional Finance theory is presented as a foundation for the subsequent section. In Sect. 2.4, previous research on the determination techniques for the cost-of-capital of business units and projects is discussed thoroughly. This includes a detailed discussion of the techniques as well as the theoretical and empirical methods adopted by other researchers.

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Section: The Business Firm Perspectivementioning

confidence: 99%

Section: Performance Measurement and Value-based Managementmentioning

confidence: 99%

Section: Performance Measurement and Value-based Managementmentioning

confidence: 99%

Section: Performance Measurement and Value-based Managementmentioning

confidence: 99%

Section: Agency Theory and Managerial Financementioning

confidence: 99%

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