See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/259189266

Impact of economic and financial indicators over the performance and

efficiency measurement

Conference Paper · June 2011

CITATIONS READS

0 246

3 authors, including:

Costin Ciora Sebastian Madalin Munteanu

Bucharest Academy of Economic Studies Bucharest Academy of Economic Studies
53 PUBLICATIONS   58 CITATIONS    20 PUBLICATIONS   58 CITATIONS   

SEE PROFILE SEE PROFILE

Some of the authors of this publication are also working on these related projects:

EcoInnEWaste View project

All content following this page was uploaded by Costin Ciora on 29 May 2014.

The user has requested enhancement of the downloaded file.

 2011 International Conference on Sociality and Economics Development
IPEDR vol.10 (2011) © (2011) IACSIT Press, Singapore

Impact of economic and financial indicators over the performance and

efficiency measurement
Costin Ciora 1 , Sebastian Madalin Munteanu 1 and Vlad Iordache1
1
The Bucharest Academy of Economic Studies, Romania
Abstract. The role of indicators, in the decision process, to measure economic performance and efficiency
is undeniable. The importance of these indicators has led to an increase of the methods throughout
companies’ measure performance. Not infrequently, economic indicators and financial performance has had
a low correlation with market performance presented by the evolution of stock prices. The objective of this
article is to bring into question the concepts of performance and efficiency. Moreover, regarding the subject
from a constructive perspective, we followed the degree of correlation between indicators that are based on
accounting information and stock indicators in a study on 20 companies listed at the Bucharest Stock
Exchange, category I and II. Using econometric methods, we obtained little or no correlation between market
indicators and measures that use information from financial statements.
Keywords: financial and economic performance, economic efficiency, economic and financial indicators.

1. Introduction
1.1. Research Objectives
Amongg the research objectives we specify:
Outlining the concept of performance between efficiency, efficacy and competitiveness.
Highlighting the limitations of indicators based on information from financial statements.
Referring to the benefits of value creation.
Arguing the low degree correlation between indicators based on accounting information and
stock market indicators through an empirical study.

1.2. Research Methodology

The steps to address the empirical study were:
Selection of companies and calculation of indicators for 2005-2009.
Applying the correlation for the 20 companies that were selected.
Developing conclusions based on the results.

1.3. Literature Review

“The business environment has never been more challenging as it is right today” (Naftanaila et al., 2009).
Addressing economic performance from the perspective of professors Niculescu and Lavalette, is related to
competitiveness, as “a competitive enterprise (advanced) is an effective organization (able to improve the
relationship between results and resources allocated) and effective (able to meet the expectations of all social
partners) at the same time.”(Niculescu, 2003)
The authors present the main ways of competitiveness of enterprises, namely:
Downsizing way - is about finding a balance by increasing productivity, and less increasing efficacy.
Upsizing way - is a method that requires a faster growth of results, and less means to obtain them.
Ideal way of competition - involving effectiveness and productivity growth. "Efficacy obtained in
these conditions automatically implies productivity gains.”
As the authors specify the application of downsizing way "does not necessarily lead to a competitive
market acceptance, and if efficacy is not satisfied we are witnessing a new negative line called crashsizing
way”. The same authors summarize the concept of performance through: (Niculescu, 2005)
PERFORMANCE = EFICACY + PRODUCTIVITY
Or
PERFORMANCE = COMPETITIVENESS

Corresponding author: Costin Ciora Tel.: + 40.744.127.443 fax: +40.31.817.34.22

E-mail address: costin.ciora@cig.ase.ro
445
 A. Bourguignon defines performance as being the achievement of organizational objectives, as an
accumulation of everything that contributes to the strategic objectives. M. Lebas emphasizes the idea that
the definition of the concept of performance given by Bourguignon seems incomplete, since it does not
define the performance characteristics to look for an operational tool.
P. Lorino supports the concept of performance development by the notion of value creation. He says
“performance for the enterprise is what contributes to improving cost – value link, and not just what helps to
reduce cost or increase value.”
Performance studies have developed the concept of creating value for shareholders of the company but
also for its stakeholders. An important category for which the company creates value is customers.
Michael Porter believes that "the company's performance depends on its ability to create value for its
clients.” Thrishler, cited by Jobin and Friel (2000), defines eight partners to be beneficiaries of the business
value creation: the employees, managers, financiers, suppliers, shareholders, community, government and
customers.
I. Jianu has made a relevant research in the field of performance measurement, presenting several
methods of how performance is being measured. The long-term market presence through competitiveness is
developed by the author in order to present the impact of performance.

2. Limits of performance measurement by information from financial

statements
“People tend to believe that each company has only one goal, the gain and this is what they see behind
any promotional or informational message. This is the reason why companies should continuously search for
new resources of gaining the trust and legitimacy of the consumers. “(Canda et al., 2010)
Methods for measuring performance and equity value through accounting information, presents several
limitation determined by the way in which the accounting standards influence their calculation.
“These methods are based on historical information and do not take into account future benefits that
might be obtained in the case of an investment.”(Munteanu et al., 2009) Moreover, the opportunity cost of
capital does not appear in the calculation of these traditional measurement indicators.
J.D. Martin and J.W. Petty professors identified five issues that may occur if the performance and value
creation is measured by accountant indicators.
- To calculate the net cash flows, several adjustments to the accounting profit have to be made.
- Accounting information does not reflect the risk of presenting historical information, and less the
opportunity of company's operations. Measuring risk is very important in calculating created value.
- The accounting information does not reflect the cost of equity related to the investors (the
opportunity cost of equity). For example, one company reporting an operating profit of 256,000 lei
on an invested capital of 6.59 million lei, may express performance through the positive value of
profit. The rate of operating profit to invested capital is 3.88% (well below the level that would be
achieved by placing the same amount in government bonds - over 6% yield). Thus, depending on
the risk-free rate and market risk premium investors require a certain level of return on invested
capital.
- Different accounting methods may have influences to the accounting results. Large differences may
occur in comparison of companies in different countries due to different accounting treatments in
these countries.
- The value in time is not represented by accounting results. Instead, the economic value reflects the
present value of future cash flows that can provide sufficient information to the company's
management to maximize shareholder value.

2. Modern indicators for performance measurement: indicators of value

creation
These problems identified by the authors can be found in the case of indicators of value creation. This
shows the need to find instruments to measure the value created, that presents the lowest number of
distortions. Indicators of value creation have gained a high importance from two main reasons: (Obrycki, 2000)
- Financial markets have forced managers and companies to rethink the approach of the financial
statements. Companies are no longer required just to generate earnings or sales growth, but
must provide an adequate return on invested capital.

446
 - Accounting information, although necessary, cannot explain market valuations and cannot
generate a way of comparability between companies.

3. Empirical analysis of the impact of accounting indicators on market

indicators
Through this study, we followed how the performance and economic efficiency of a company is
reflected in the accounting indicators, compared with market evolution. To strengthen the above statements
we followed the degree of correlation between variation of earnings per share (EPS) and Price Earnings
Ratio (PER). Earnings per share should provide a clear picture to PER.
A positive percentage variance of earnings per share should lead to a high value of the PER. The
methodology used was to find the degree of correlation between the percentage increase in EPS and PER, on
a sample of 20 companies listed on the Bucharest Stock Exchange, Class I and II., for a period between
2005-2009. A level of correlation of +1 expresses a perfect positive correlation, while a level of -1 reflects a
perfect negative correlation.
The degree of correlation between the percentage change in EPS and PER indicator is presented in the
figures below. We can notice the lack of any direct correlation for all the 20 companies that were analyzed.
This may reflect the need to use other indicators to measure performance that are not influenced by
accounting distortions.
The average of the series that includes the correlation coefficients was -0.102, with a maximum of 0.832
and a minimum of -0.831 (this value indicates a reverse connection, present in two of the companies
analyzed).

Fig. 1: The correlation between Δ% EPS and PER for the first 10 companies

Fig. 2: The correlation between Δ% EPS and PER for the last 10 companies

447
 Fig. 3: The correlation between Δ% EPS and PER

The low level of correlation between the variation of EPS and PER is obvious in the analyzed companies.
Thus, 70% of them encounter a negative correlation, and only 28% of them, the correlation is lower than -0.5.
Only two companies have a correlation greater than 0.5. The largest company in the sample, OMV Petrom
has a negative correlation level of -0.684.

No. COMPANY Correlation

1 AEROSTAR -0,210
2 ALRO -0,390
3 ANTIBIOTICE 0,717
4 AZOMURES 0,296
5 BIOFARM 0,832
6 IMPACT -0,370
7 MECHEL -0,202
8 OILTERMINAL -0,267
9 OLTCHIM 0,328
10 OMV PETROM -0,684
11 PRODPLAST -0,058
12 ROMPETROL RAFINARE 0,402
13 SINTEZA -0,010
14 SOCEP -0,671
15 T.M.K. - ARTROM S.A. -0,078
16 TITAN -0,423
17 TURBOMECANICA 0,492
18 VAE APCAROM -0,831
19 ZENTIVA -0,358
20 ZIMTUB S.A. -0,568
Table 1: The correlation between Δ% EPS and PER

4. Conclusions
The need to measure performance is even more obvious, as it can present a high level of decoupling of
accounting indicators from the indicators that measure market reaction, through the price investors are
willing to pay for a monetary unit of net profit. Developments in global financial markets led to development
of the companies. Important events that influenced the economic and financial life contribute increasingly to
change in the logic of measuring performance. Whether if it is the dot-com crisis, bankruptcies of famous
large corporations (Enron, WorldCom, Lehman Brother), or current events related to the financial crisis
(later transformed into an economic one), companies must measure performance or opportunity of non-
performance. Using indicators uncorrelated with market reaction may lead to further confusion and
difficulties for companies. In the present study, the results could be surprising. The lack of any direct or
448
 indirect correlation between two indicators used both by analysts and managers can lead to conclusion of
elimination of common financial language.

Change in the communication elements (indicators) must lead to separation of performance indicators
that measure real performance and which are effective in the traditional sense for managers, analysts or
financial executives. The present study is a starting point in our research, in which we hope we will find
challenging information for strong conclusions.

5. Acknowledgements
This article is a result of the project POSDRU/6/1.5/S/11 „Doctoral Program and PhD Students in the
education research and innovation triangle”. This project is co funded by European Social Fund through The
Sectorial Operational Programme for Human Resources Development 2007-2013, coordinated by The
Bucharest Academy of Economic Studies.

6. References
[1] I. Anghel, M. Oancea-Negescu, A. Anica-Popa, A.M. Popescu. Business Valuation. Economic Publishing House.
2010.
[2] A. Bourguignon, Peut-on definir la performance? Revenue Francaise de Comptabilite. In: Revenue Francaise de
Comptabilite, July-August, 1995.
[3] A. Canda, M. Rusescu, C. Pantea. Revealing the people who empower the social networks – an exploratory
research of the Romanian market. In: Proc. of 17th International Economic Conference. Sibiu. 2010. pp. 30-36.
[4] C. Cicea. Efficiency and evaluation in higher education. Eficon Press. 2006.
[5] R. Danziger. Encyclopedie de Comptabilite, Controle de Gestion et audit. Economic Press. 2000.
[6] F.J. Fabozzi, J.L. Grant. Value-Based Metrics: Foundations and Practice. John Wiley and Sons. 2000.
[7] I. Ionita. Quality management and value engineering. ASE Press. 2008.
[8] I. Jianu. Performance – a notion between ambiguity and clarity. Journal of Accounting, experise and business
audit. no.5.2006.pg.18.
[9] M.H. Jobin, T. Friel. La logistique revisitee ou l’integration dynamique de plusieurs chaines de valeur. 2008.
[10] M. Lebas. Oui, il faut definir la performance. Revenue Francaise de Comptabilite. July – August. 1995.
[11] P. Lorino. Comptes et recits de la performance. 1995
[12] J.D. Martin, J.W. Petty. Value-Based Management: The corporate response to the shareholder revolution. 2000.
[13] I. Naftanaila, I. Hotaran, G. Cioana. A dynamic approach to manage the production capacity. In: Proc. of
International Conference: Modern Approaches in Organisational Management and Economy 2009 Third Edition.
Special Issue. Volumul 1. pag. 519-524.
[14] M. Niculescu. Strategic global diagnosis, Financial diagnosis. Economic Publishing house. 2003.
[15] M. Niculescu, G. Lavalette. Increasing strategies. Economic Publishing house. 2005.
[16] D.J. Obrycki, R. Resendes. Economic margin. The link between EVA and CFROI. 2000
[17] M. Porter. Competitive advantage. InterEditions. Press. 1986.
[18] G. B. Stewart. The quest for value. Harper Business Press. 1990.
[19] G. Valceanu, V. Robu, N. Georgescu. Financial and Economic Analysis. Economic Publishing House. 2005
[20] I. Vasilescu. Project Management. Eficon Press. 2004.
[21] I. Vasilescu, M. Andreica, C. Banacu, M. Botezatu. Modern approaches in management and organization
economy.vol.4. Economic efficiency and managerial performance of the organization. Economic Publishing
House. 20

449

View publication stats