The Dynamics of Capital Allocation

34 Pages Posted: 16 Dec 2000

See all articles by Neal Stoughton

Neal Stoughton

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Josef Zechner

Vienna University of Economics and Business

Date Written: December 2000

Abstract

Financial institutions are facing increased pressure to enhance shareholder value. This has lead to the popularity of practical techniques such as EVA and RAROC. The major purpose of this study is to illustrate the interaction between incentive-based compensation and performance evaluation in a multiperiod setting. We demonstrate that while EVA can justifiably be used to incentivize managers to make better current investment decisions, performance measurement techniques such as RAROC help the firm to better assess abilities for the future. The model is applied to understand why hard position limits are employed as well as softer incentive contracts and what sort of termination standard should be used for the investment manager.

Suggested Citation

Stoughton, Neal M. and Zechner, Josef, The Dynamics of Capital Allocation (December 2000). EFA 0328; AFA 2001 New Orleans. Available at SSRN: https://ssrn.com/abstract=249987 or http://dx.doi.org/10.2139/ssrn.249987

Neal M. Stoughton (Contact Author)

Vienna University of Economics and Business ( email )

Austria

Vienna Graduate School of Finance (VGSF) ( email )

Austria

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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