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Are Real Investment Decisions Based on Risk Adjusted Performance Measures Consistent with Maximizing Shareholder Value?

Journal of Risk (2012), 15 (2), pp. 77-101

22 Pages Posted: 21 Dec 2011 Last revised: 29 Sep 2013

Niklas Lampenius

University of Hohenheim

Date Written: January 20, 2010

Abstract

We show that the usage of risk adjusted performance measures (RAPM), such as the RORAC or the RARORAC, as decision criterion for real investment decisions might favor projects that do not maximize shareholder value for project selection of mutually exclusive projects. We find that RAPM based on the CVaR are in general more consistent with the NPV-criterion than RAPM based on the VaR. In addition, measures that are based on the relative (C)VaR are more consistent with the NPV-criterion than measures based on the absolute (C)VaR. Overall we find that the RARORAC based on the relative (C)VaR outperforms all evaluated RAPM in this context.

Keywords: risk management, risk adjusted performance measures, RORAC, RARORAC, shareholder value, VaR, CVaR

JEL Classification: D92, G31, G32

Suggested Citation

Lampenius, Niklas, Are Real Investment Decisions Based on Risk Adjusted Performance Measures Consistent with Maximizing Shareholder Value? (January 20, 2010). Journal of Risk (2012), 15 (2), pp. 77-101. Available at SSRN: https://ssrn.com/abstract=1975091

Niklas Lampenius (Contact Author)

University of Hohenheim ( email )

Stuttgart, 70593
Germany

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