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Ch16 - Performance measurement(2)

M

mystery128

Member
I have a couple of doubts:

1. In chapter 16 page 6, under section 2.1 a sentence states: "A seperate point is whether decreases or increases in share prices should, in themselves, be part of the control process."

Since share prices cannot be controlled, how can the change in share price be a part of the control process?

2. In chapter 16 page 11, under section 3.2 a sentence states: "Generally, a high actual projected return on capital using normal accounting measures and a starting measure of market capitalisaion, would imply, in the framework of the CAPM, the successful creation of intangible assets and shareholder value."

I am unable to understand what this sentence is trying to state.
 
Chapter 16

Hi, This is a strange bit of core reading altogether and rarely examined. The first part about a "control process" I think refers to the fact that investors can use the share price as an indication of how the company is doing. If the share price goes up (and we believe in efficient markets) then the company has done something good. If it goes down the reverse is true. So investors can look at the movements in the share price to help the process of analysing the company's value and prospects. I think thats the "control process" referred to.
The second statement refer to the creation of "intangible assets". These are not the ones that appear in the accounts like goodwill, reseach costs etc. the idea is that if a company shakes hands with a potetial client and agrees a contract that will run for the next three years, an asset has been created because of the future value of that contract to the company. In a CAPM balance sheet, the company's share price should rise to reflect this, even though on the real balance sheet the value will trickle through as the cashflows are received. So if a company starts a project with a high return on capital, it has created shareholder value and created an intangible asset for the CAPM balance sheet.
 
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