Welcome to Class 20

Thoughts for Today, Tomorrow, and The Future

Chapter 9

Performance Perception:

A Stakeholder Perspective

&

Corporate Performance:Satisfaction is variable

Long-term Investors Short-term Investors Short-term Creditors Long-term Creditors Top Management Teams (TMTs) Employee Unions Take-over Firms

Assessments may vary by stakeholder group

Stakeholder groups include:

Common methods for collecting assessment-

useful performance data

Assessment

Method

Accounting

Method

Adjusted“Accounting”

Method

MarketMethod

Accounting Method

Net Worth Revenues Profits (Gross & Net) Asset Utilization & Operating

Leverage Debt Management & Financial

Leverage Equity Returns Cash Flows Liquidity

Examines data about:

Problem: Balance Sheet values are frequently either exaggerated

or substantially understated due to depreciation methods used.

Adjusted “Accounting” Method

Estimated current value of assets Identifies and eliminates Goodwill

and related non-marketable intangibles

The value of recalculated financial ratios originally based on the Accounting Method

Examines data about:

Problem: Values used are based on the estimators assessment

which are often significantly incorrect.

Market Method

Price/Earnings ratios (TPE, FPE, PEG) Stock Beta Market Capitalization

Examines data about:

Problem: 1. Values used are based on UNQUANTIFIABLE (therefore unverifiable)

CORPORATE RESOURCES (such as Knowledge Capital). 2. Decisions are also frequently tied to movements within the market and

these, according to the former Fed Chairman (Alan Greenspan) often demonstrate irrational behavior.

3. Scholarly studies have discovered that values have been manipulated by TMTs, offering short-term benefits to some investors and costly crashes for long-term investors.

(see your text for more specific details)

Market Method

Book Value to Market Value Ratio has been decreasing steadily

Does this represent illusionary value of UNQUANTIFIABLE (unverifiable) corporate resources?

Does this encourage TMTs to manipulate market values?

Think about it and YOU be the judge.

Risk of illusionary values:

This may or may not be a problem, however,

let the investor beware.

Market MethodRisk of illusionary values increasing?

1982 1992 20120

10

20

30

40

50

60

70

Relationship between Book Value and Market Value is decreasing

19.2%38.1%62.2%

The 7 Stakeholder Groups can be associated with specific Assessment Methods

1. Long-term Investors 2. Short-term Investors 3. Short-term Creditors 4. Long-term Creditors 5. Top Management Teams (TMT) 6. Employee Unions 7. Take-Over firms

See page 242 of your online textbook for complete details

Summary A firm’s level of performance is largely a matter of

perspective Perspectives differ among the 7 Stakeholder groups The three primary methods are Accounting, Adjusted

“Accounting”, and Market. Each of the three methods has both benefits and drawbacks It is important to understand the strengths and weaknesses

of each in order to appropriately judge performance within the context of a particular stakeholder group

The Market Method has become increasingly popular The Market Method has many benefits but also some

significant dangers for misuse and abuse.The primary objective here is to raise relevant questions, identify potential negative consequences of data sources, and sharpen awareness skills of the PSC user.