Corporate Decision-Making with Macroeconomic Uncertainty: Performance and Risk Management

Corporate Decision-Making with Macroeconomic Uncertainty: Performance and Risk Management

Corporate Decision-Making with Macroeconomic Uncertainty: Performance and Risk Management

Corporate Decision-Making with Macroeconomic Uncertainty: Performance and Risk Management

Synopsis

Macroeconomic turbulence and volatility in financial markets can fatally affect firm's performance. Very few firms make serious attempts to inform market participants and other outsider stakeholders about the impact of macroeconomic fluctuations--manifested as changes in exchange rates, interest rates, inflation rates and stock market returns-- on performance. These stakeholders, as well as financial analysts, must make their own assessments but they generally lack both the required tools and the information to do so. Worse, top management in most firms do not themselves possess the tools to identify whether a change in performance represents a change in the firm's intrinsic competitiveness or a reflection of macroeconomic conditions outside their influence. Corporate Decision-Making with Macroeconomic Uncertainty: Performance and Risk Management develops and presents in an easily comprehensible way the essential elements of a corporate strategy for managing uncertainty in the macroeconomic environment. This Macroeconomic Uncertainty Strategy, or MUST, enhances firm value by allowing management and external stakeholders to become better informed about the development of corporate competitiveness in a turbulent macroeconomic environment. The MUST also provides guidelines for how to develop a successful risk management program. This research based book includes methods to identify the impact of macroeconomic fluctuations on cash flows and value, to develop strategies for macroeconomic risk management, to provide informative reports to external stakeholders, to evaluate the relative performance of subsidiaries and business units in multinational companies, and to evaluate performance for purposes of setting executive compensation and of fulfilling the due diligence requirements in an M & A context. The authors' use of value-based management, various performance measurements, the concept of real options, and risk management from the perspective of shareholder wealth maximization, makes the book rich and compelling. They address researchers and students in the field of international business, finance and corporate governance. On the business side, executives with strategic responsibilities, chief financial officers, and bankers who analyze corporate performance and give advice on risk management will benefit from reading this book.

Excerpt

Within the last three decades, firms and organizations, regardless of size, have been subject to changes in the conditions for doing business including increased uncertainty about shocks and disturbances in the world economy. These developments require new strategies wherein management recognizes the interdependence of exchange rates, interest rates and inflation rates influencing the firm through a variety of channels not captured by conventional accounting systems. This book is aimed at providing the essential tools for managing risk and assessing the development of corporate performance and competitiveness in this new economic climate.

With our book Macroeconomic Uncertainty: International Risks and Opportunities for the Corporation, published by John Wiley in 1987, we opened up a new strand of literature emphasizing the impact of a volatile macroeconomic environment on corporate risk exposure. In 1997 we expanded the view by including a profit filtering process in the book Managing in a Turbulent World Economy: Corporate Performance and Risk Exposure, published by John Wiley. In that book, we also developed the Macroeconomic Uncertainty Strategy (MUST) analysis. In C orporate Performance and the Exposure to Macroeconomic Fluctuations, published by Norstedts Academic Publishers in 2005, we expanded the research reported in these two books by adding issues on performance measurement as an important ingredient of Value-Based Management (VBM), on corporate reporting of the impact of macroeconomic fluctuations and on the use of real options—investment in flexibility of operations—as a potential substitute for financial risk management. The current book is a further expansion of these three books. We have, among other things expanded on the role of the MUST analysis in a Cash Flow at Risk (CFaR) approach and on ex post evaluation of a chosen strategy in order to obtain . . .

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