G40 - Behavioral Finance: GeneralReturn

Dissatisfaction with traditional accounting-based performance measures has spawned a number of alternatives that could be used for performance-based compensation mechanism, as well. In connection with theory of agency costs there is a problem of the relationship principal - agent that is defined in the contract as a tool of mitigation the inherent conflict between managers and shareholders. Firms may be able to improve incentives by relying directly on other measures of performance which more accurately reflect the manager's contribution to firm value. Currently the most popular Value based measure is Economic Value Added (EVA). There is a debate about whether the new performance measures have a higher correlation with stock values and their returns than do traditional accounting earnings. Opinions of how to design the compensation contract differ widely. Some argue that managers should be paid according to stock price performance. The others argue that stockbased compensation imposes excessive risk on the managers, because firm returns reflect the factors beyond manager's control (i.e. inflation, etc.). The "value-added" of EVA by firms and industry was empirically estimated. These estimates are positive and significant in predicting which firms have actually adopted EVA as an internal performance measure

The article deals with the dynamic approach to the company's performance assessment. The role of dynamic management does not include simple collection off the relevant data from different informational resources but directs the attention of managers to their interpretation for effective fulfilling of the tasks of the company. Can the managerial contribute to the value added process? Special attention was paid to the modern approaches of creating Value Added Chain. Managerial approach to the firms' performance evaluation faces the problems with identifying relevant costs and relevant revenues. Even more difficult to identify them, create the new models for complex evaluation of company's performance such as Balanced Scorecard or a model of European Foundation of Quality Management. The successful managers have to initiate and participate in the process of continuous improvement of company's performance and thus create the development potential.

The aim of the article is a mathematical derivation of rules for construction of net present value function given the assumption of conventional and non-conventional cash flows. For non-conventional cash flows the following combinations of positive (+) and negative (-) cash flows have been considered for NPV function construction: (+, -, +), (-, +, -), (+, -, +, -), (+, -, +, -, +). The article also attempts to indicate the most frequent mistakes in calculation and interpretation of the function.