Good And Bad News For The Implementation Of Shareholder-Value Concepts In Decentralized Organizations - A Critical Study Comparing the DCF Method and the EVA Method

This paper investigates the suitability of different performance measures to evaluate the performance of investment center managers, when intrafirm coordination problems arise between headquarters and divisional management. The performance measures analyzed are based on available accounting information: cash in- and outflows, depreciation and book value. We characterize the entire class of time-variant performance measures that (i) enable the implementation of a given investment level non-trivially and/or (ii) induce goal congruence between both parties for inelastic and elastic investments. The findings show the possibilities and limitations of different performance measures as adequate control instruments. In particular, the findings for two methods often used in everyday business operations – Economic Value Added (EVA) method and Discounted Cash Flow (DCF) method – are discussed in detail.