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Welcome to Class 19. Thoughts for Today, Tomorrow, and The Future. Chapter 9. Performance Perception: A Stakeholder Perspective. &. Debate: Teams 1 vs. 6. Corporate Performance: Satisfaction is variable. Assessments may vary by stakeholder group. Stakeholder groups include:.
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Welcome to Class 19 Thoughts for Today, Tomorrow, and The Future Chapter 9
Performance Perception:A Stakeholder Perspective & • Debate: Teams 1 vs. 6
Corporate Performance:Satisfaction is variable Assessments may vary by stakeholder group Stakeholder groups include: • Long-term Investors • Short-term Investors • Short-term Creditors • Long-term Creditors • Top Management Teams (TMTs) • Employee Unions • Take-over Firms
Common methods for collecting assessment-useful performance data
Accounting Method Examines data about: • Net Worth • Revenues • Profits (Gross & Net) • Asset Utilization & Operating Leverage • Debt Management & Financial Leverage • Equity Returns • Cash Flows • Liquidity Problem: Balance Sheet values are frequently either exaggerated or substantially understated due to depreciation methods used.
Adjusted “Accounting” Method Examines data about: • 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 Problem: Values used are based on the estimators assessment which are often significantly incorrect.
Market Method Examines data about: • Price/Earnings ratios (TPE, FPE, PEG) • Stock Beta • Market Capitalization Problem: Values used are based on UNQUANTIFIABLE (therefore unverifiable) CORPORATE RESOURCES (such as Knowledge Capital). Decisions are also frequently tied to movements within the market and these, according to the former Fed Chairman (Alan Greenspan) often demonstrate irrational behavior. 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 Riskof illusionary values: • 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. This may or may not be a problem, however, let the investor beware.
Riskof illusionary values increasing? Market Method 62.2% 19.2% 38.1%
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 primarymethods 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.
