TradeBriefs Editorial

From the Editor's Desk

What's the Best Way to Create Long-Term Value?

It's a well-known paradox. Most executives are committed to the idea of maximizing long-term shareholder value, but when they want to track and improve performance, they focus on a dizzying variety of short-term measures (and acronyms). ROA. ROC. TSR. EBIT. EBITDA. CAR. EPS. We could go on.

Why this focus on short-term measures? In large part, because they're easy to obtain, easy to use, and have been widely used in the past. The problem, as studies have long made clear, is that optimizing short-term accounting measures and ratios often doesn't maximize long-term value. To think clearly and effectively about long-term value, companies need a better measure - and, as we write in a recently published article in the Strategic Management Journal, we've devised one that we call LIVA, short for Long-term Investor Value Appropriation.

The idea behind LIVA is simple: Add up the net present value of all the investments a firm has engaged in over a long period of time. The key insight from our analysis is that this can be done by using publicly available stock-market data. LIVA uses historical share-price data to calculate the value a company has either created or destroyed for its entire investor base over a long time period.

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