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The Research of EVA in Project Decision-making Based on the Perspective of Managerial Entrenchment

Author: ChenLing
Tutor: ChenGeZhi
School: Southwestern University of Finance and Economics
Course: Technology Economics and Management
Keywords: Managerial Entrenchment EVA ( economic value added ) Project Investment Decision Inefficient Investment
CLC: F272
Type: Master's thesis
Year: 2011
Downloads: 92
Quote: 0
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Abstract

Shareholders to put money into the enterprise, the enterprise was able to establish and develop, so shareholders are the business owner, the primary responsibility of the enterprise is to create value for its shareholders to maximize shareholder value has become a global standard for business objectives. This requires building a sound corporate governance structure, to maximize the value-oriented business culture, the growing enterprise value, so that a satisfactory return to shareholders, and shareholders for their continued trust and support in order to win. The value of the business fundamentally depends on the investment behavior of enterprises, investment behavior has the ability to maximize efficiency is directly related to the enterprise value. Inefficient Investment is a corporate or shareholder value maximization as the goal of the investment behavior, it will not only affect the optimal allocation of capital, and waste a lot of resources and factors of production, but also the formation of bad debts, bad debts, which also increased the company's financial risks. In reality, however, many companies exist to varying degrees blind diversification, investment in short-sighted, over-investment and lack of investment in non-efficient behavior. Lead to business investment behavior of non-efficiency reasons are many, both possible conflicts of interest caused by different stakeholders, it may be due to the external market environment and its changes. However, due to the management of defense of the manager as a result of non-efficiency is an important investment decisions, especially in the context of this management and ownership of the modern enterprise phase separation, the manager has a decisive role in the outcome of the investment decisions. Managers Defense (managerial entrenchment) is the manager of internal and external control mechanisms, and to adopt to reduce the threat of jobs and the pursuit of self-interest maximizing behavior. Once fired, older and less educated, less professional experience these adverse personal factors will increase the manager's choice of investment projects under the management of defense perspective will be more the manager personal factors and risk preferences conversion costs. Under normal circumstances, the project's NPV (net present value) is greater than zero shareholders will accept the project investment managers maximize the pursuit of personal interests for the maintenance of their own posts and they prefer to enterprises in the past to invest the money to invest NPV is less than zero, but is conducive to the interests of the individual projects, so that it could lead to over-investment, which in turn will produce non-efficiency investments. General principal-agent literature assume that the choice of enterprises to invest in the project is based on the maximization of shareholder value, but managers Defense Perspective enterprise investment projects selection may not be based on shareholder value maximization. The Managerial Entrenchment is a principal-agent scope of the study were able to generate agency costs, but with the principal-agent literature emphasizes the motivation is not the same, but the impact is also a wide range of. The principal-agent theory and more emphasis on the manager's job consumption, leisure behavior, the Managerial Entrenchment stressed managers who reduce their positions threats made contrary to the interests of the shareholders. Managers in order to reduce the threat of jobs, at this stage of the project decision-making, implementation and management of defense measures on the selection of projects in order to maximize shareholder value as the goal. Manager purpose of doing so mainly from two considerations: on the one hand, to select non-efficiency investment projects to enable them to remain in office, even after the implementation of the project managers of poor performance, such as: diversified investment managers of the project the operation has control over, and thus difficult for shareholders to replace them easily, although this risk aversion instinctively looks make the interests of managers and shareholders of the target inconsistent, and even produce a reduction in the value of the shareholders' wealth; On the other hand, the traditional project decision-making evaluation method is mainly used for the project prefeasibility evaluation of the implementation of the project and then using other methods to evaluate the benefits of the project, in order to examine the performance of the managers. Pre-and post-project evaluation index is out of line, resulting in the manager's performance is difficult to be reflected, would subject them to the risk may be dismissed, then in order to reduce the threat of jobs and safeguard their own interests will be taken in the choice of project management defensive measures, eventually lead to inefficient investment. So, we need to find an evaluation method throughout the entire project, project decisions, it can be the same with the traditional decision-making methods of project feasibility evaluation of the implementation of the project and then be able to use it to evaluate the performance of the managers. EVA (economic value added) called Economic Value Added, also known as \'This paper is to study how the EVA method applied to the project decision-making, making it an evaluation method throughout the project, and then come back on this basis, focus on how it applies to managers Defense background the project. Take different perspective --- managers management defensive behavior factors as an entry point from the decisions of managers and shareholders, the standard deviation of what will be the way, this bias, then look through the EVA a certain approach to reduce this bias, the EVA can make better use of project decision-making. After the demonstration, I believe that EVA can be applied to the evaluation of project decision-making, it is conducive to the coordination of managers and shareholders decisions deviation, so that they are able to jointly use it as a decision-making criteria, as long as each of EVA is greater than zero, the project can be their accepted. On the other hand, the traditional decision-making evaluation method is only invested and the cost of debt capital deductions, so that is not very clear reflection of the project the real profitability, EVA calculation on the basis of the estimated net profit minus Shareholders' equity cost of capital, so that a more accurate description of an investment project annual value for the enterprise, but also more fully reflect the performance of the managers so that they can keep their jobs and get additional incentives. In fact, thus indirectly inhibit the manager's management defensive behavior, thus contributing to the manager standing in a shareholder's perspective thinking and decision-making. The paper is divided into four parts: The first part is a review Managerial Entrenchment efficiency of corporate non-investment relationship literature summarizes the current measures to reduce the defense of managers and shortcomings, and should take a new perspective and from the roots up identify the nature of the problem; then use the data of listed companies, to select its own characteristics and background variables related to several managers to build Managerial Entrenchment index, in order to observe the managers of listed companies in recent years management defense of the status quo, as behind the fourth part of the introduction to pave the way; second part of this paper, EVA to make decisions related to the principles and theories of the evaluation were introduced; Part III EVA decision evaluation method is compared with the traditional approach to decision making, indicating EVA feasibility of the approach and evaluation features, in addition to effectively measure the profitability of the project, it is more conducive to the decision-making criteria for the shareholders and managers agree on any EVA project can be recognized by both greater than zero; The four-part project is the basis of the analysis in the previous chapters up to talk about how to apply EVA managers Defense background. From managers management defensive behavior factors as a starting point, what kind of deviation from the decisions of managers and shareholders, the EVA to see this bias, to take certain measures to reduce this bias, such as the use of risk subsidies, change the depreciation method and the like, and the EVA as to better utilize the project decision-making.

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