Management team view and the value management process: association analysis of Brazilian public companies.

• Author: Frezatti, F

ABSTRACT

Management team view and the value management process: association analysis of Brazilian public companies

This study investigates the relationship between the goodwill value enjoyed by Brazilian public companies and their ideas and opinions about value management. Two kinds of research are presented. The first is based on a questionnaire, whereas the other analyzes the quarterly MVA[R] between 1995 and 1998. MVA[R] (Market Value Added)--that is, market value less capital invested--is chosen as the proxy measure for goodwil, and is computed according to Stewart's procedures, using market values (for prices) and book values (for capital invested). The main issues explored in this research are what companies think about value, how they apply the concept, and which tools they prefer in management accounting. The main findings show that three variables are significant for the companies that have improved their MVA[R] performance during the period under review.

Key words: market value added, MVA[R], management performance.

1. Introduction

   Accounting provides different services to different clients. Some of these clients are more demanding in relation to how the information should be developed and which rules should be followed, whereas others are less demanding. Financial accounting is a branch of accounting that provides relevant information to external clients. Management accounting does the same for internal clients. Some researchers believe that, eventually, the financial and management branches of accounting will become one. In some markets, this seems to be possible.

   One important incentive for accounting to improve itself is provided by a strong stock market. Initially, its the effect of the strong stock market is mainly felt in the field of financial accounting. At a later stage, management accounting also feels its influence. In practice, accounting is challenged to deal with distortions resulting from its efforts to avoid asymmetric information. This is an important issue for public companies. The more visible a company becomes through the figures it provides to its clients, the greater the amount of work that is required to provide these figures. At the end of the day, information is important for making proper decisions. But this costs money, which means that it impacts on the wealth of stockholders. Consequently, some stockholders can argue that the cost of the information does not match its benefits, and might refuse to invest sufficient money in it.

   From the perspective of planning, an organization needs to adopt a long-term financial metric. The entity needs at least one reliable financial indicator that will direct management towards the proper decision. No matter which tool is chosen, management accounting lies behind it. Value management is conceptualized as a kind of activity that must be developed to provide day-by-day answers. The business plan is aimed at improving and increasing company value. Although the business plan does not function from a short-term perspective, short-term goals must be consistently achieved to reach the aim of the business plan.

   Common sense tells us that good practice provides good results. This belief is critical for the development of accounting. Many entrepreneurs have doubts about it due to their own experiences or due to the stage their companies have reached in specific sectors. More specifically, in the past, Brazil went through a period of high inflation and high government interference in the economy, including accounting rules. As a result, the level of development in some areas of accounting was higher than in others. The treatment of accounting figures under inflationary conditions was considered critical and professors of the Universidade de São Paulo developed significant academic and practical work in this field. In particular, Professors Sérgio de ludicibus, Eliseu Martins, and Armando Catelli made significant improvements in the price-level treatment of accounting information. Management accounting was also developed in many companies but, as a result of the conditions described above, some investors do not consider it to be as useful as it actually is. The major objectives of this paper are to investigate: (i) what companies think about value; (ii) what they do with the concept of value; (iii) which is their long-term financial indicator; and (iv) whether this correlates with results perceived in the market.

   To calculate goodwill, it is necessary to compute the market value of a business and deduct the capital invested in the business. This cannot be achieved without a strong and consistent management accounting system. Common sense dictates that the better the information system, the greater the chance of the entity improving its results. In other words, when investing in management accounting, the organization expects a significant favorable trade-off for investing in this resource (rather than another) in attempting to raise value. Consequently, the research question of the present work can be defined as: 'Does there exista relationship between what Brazilian companies know, think and use value management concepts and MVA[R] performance?'.

   The period from 1995 to 1998 was chosen due to the relative stability of the stock market at this time, and the absence of any heterodox economic plans. It was also a period in which the stock market showed good results. In this context, the main goal of this research is to identify what the companies think, know, and use in relation to value management. The field survey can be justified on the basis that, although the stock market is very important, very little published research in this area has focused on value based management.

   This paper does not attempt to establish whether the use of MVA[R] by the companies is beneficial in itself. Actually, the analysis is conducted from the external perspective and even the MVA[R] figures were computed by the author and not by the management team of each entity. In other words, there is no intention to obtain evidence that an organization is better off using MVA[R]. Rather, according to the MVA[R] perspective of performance, the author sought support for the conceptual framework envisaged, and tried to identify a link with what the management team thinks, knows, and uses in this respect.

2. Theory development

   2.1 Stockbolder's value

   According to Rappaport (1997:1): "... value will more than likely become the global standard for measuring business performance". The takeover movement in the latter hall of the 1980s provided a powerful incentive for stockholders and managers to focus on the creation of value. On a global basis, Faseruk and Coady (1997:60) considered that: "the valuation process in developed countries has become a strategic exercise refined to the point where companies are now examining all aspects of their operations in order to identify opportunities for value creation, particularly through value-based management decision techniques". The investor does not pay more for an asset than it is worth (Damodaran, 1996:1) but, in a practica1 sense, the how to question must be solved. Although this issue is considered important, it is not explored any further in this particular study.

   2.2 Long-term financial tool

   A financial indicator is used on a long-term basis for strategic and tactical plans, and can be defined, prepared, and implemented to improve company value. The question of which indicator is best lies outside the scope of this article. Nevertheless, it is clear that a proper accounting information system is an important part of the entire system that enables an organization to improve its value performance. In a coordinated effort, professionals, concepts, systems, and procedures can optimize the economic results, and this will be reflected in the market, assuming that there exists a satisfactory communication process. In this way, the expression 'value management', as used in this paper, should be interpreted as active management accounting in support of business decisions. In this sense, if the management team uses MVA[R] figures to guide decisions, management performance and investment decisions are linked to a mixed indicator that captures not only internal economic factors (such as investment performance), but also externa1 perception (which is related to the stockholders' reaction to future perspectives). Allowing for management performance and investor perspective, MVA[R] is an adequate tool to control the trade-offs and reduce the agency problems.

   2.3 MVA[R] components

   The MVA[R] (Market Value Added) is the goodwill which the market attributes to the entity, and serves as a periodical metric. To put it in In a very simplified way, Market Value Added equals market value less capital invested. It is the proxy adopted to compute the deducted capital that was invested in the operational business, considering the market value of the entity. At any given time, when analyzing...