<ul><li><p>Creating Shareholder Value by Alfred RappaportReview by: Andrew StarkThe Accounting Review, Vol. 62, No. 4 (Oct., 1987), pp. 852-853Published by: American Accounting AssociationStable URL: http://www.jstor.org/stable/247798 .Accessed: 18/06/2014 18:41</p><p>Your use of the JSTOR archive indicates your acceptance of the Terms &amp; Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp</p><p> .JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org.</p><p> .</p><p>American Accounting Association is collaborating with JSTOR to digitize, preserve and extend access to TheAccounting Review.</p><p>http://www.jstor.org </p><p>This content downloaded from 195.34.79.15 on Wed, 18 Jun 2014 18:41:36 PMAll use subject to JSTOR Terms and Conditions</p><p>http://www.jstor.org/action/showPublisher?publisherCode=aaasochttp://www.jstor.org/stable/247798?origin=JSTOR-pdfhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp</p></li><li><p>852 </p><p>view the user decision and agency perspectives as complementary rather than mutually exclusive. </p><p>The editors commend the book to 'a wide audience' (p. 2). However, given the age distri- bution, content, and interdisciplinary mix of the readings, this volume is likely to be of interest mainly to students of the evolution of economic and accounting thought, and more especially to those with a strong interdisciplinary interest in the two fields. Even so, it will be found that eco- nomic and accounting concepts of income relate as associates rather than kin. For example, the editors correctly describe a group of five papers by economists as having 'no particular concern with accounting or the measurement of business income' (p. 3). The book should also be useful as supplementary reading in a graduate or senior- level accounting theory course, but the price of $55 might dictate recommended rather than re- quired status. </p><p>KENNETH W. LEMKE Professor of Accounting </p><p>University of Alberta </p><p>ALFRED RAPPAPORT, Creating Shareholder Value (New York and London: The Free Press and Collier Macmillan Publishers, 1986, pp. xv, 270, $23.95). </p><p>Professor Rappaport has produced an interest- ing book, broad in scope, which integrates ideas taken from finance, accounting, economics, and strategic management. There are two central themes of the book. First, it is argued that ac- counting targets, such as growth in earnings per share or accounting rates of return, potentially mislead management into making decisions and adopting business strategies that are non-optimal from the point of view of creating shareholder value. Second, the present focus of attention on discounted cash flow analyses should be enlarged from individual capital investments to the assess- ment of alternative business strategies at both the corporate and individual business unit levels. The book builds on ideas derived from Michael Por- ter's book, Competitive Strategy (New York: Free Press, 1980), and demonstrates a framework of evaluation for how these ideas can be analyzed from the point of view of the creation of share- holder value. </p><p>The book is laid out as follows. Chapter 1 pro- vides a justification for the use of the shareholder value approach as the best means of achieving the traditional corporate goals of maximizing </p><p>The Accounting Review, October 1987 </p><p>shareholder wealth and, hence, serves as an in- troduction to the book. Chapters 2 and 3, which form Part I of the book, are concerned with the shortcomings of accounting numbers as indica- tors of the ability to create shareholder value and the applicability of discounted cash flow tech- niques to alternative business strategies, respec- tively. In addition, Chapter 3 introduces what Professor Rappaport refers to as value drivers, that is, those parameters that drive the cash flow performance of a corporation and that, hence, are central concerns of shareholder value-creating business strategies. These include growth in sales, operating profit margin, and incremental invest- ment rates in fixed and working capital invest- ment. </p><p>Part II of the book, encompassing Chapters 4 through 7, is concerned with linking Porter's ideas with the shareholder value approach at both conceptual and practical levels. Thus, Chapter 4 covers the link conceptually, with Chapter 5 illustrating practical applications of the approach. Chapter 6 is concerned with the financial feasibility of alternative business strate- gies while Chapter 7 points out what share prices tell about market expectations and hence what relationship might be expected between the adop- tion of business strategies consistent with the shareholder value approach and the performance of a company's shares in the market. </p><p>Part III (Chapters 8 and 9) of the book con- siders some specific additional issues. Chapter 8 is concerned with how to evaluate performance and appropriately develop executive compensa- tion schemes. The point is made that unless per- formance evaluation and executive compensation are tied to the creation of shareholder value, the value of any planning process based on the crea- tion of shareholder value will be lost. The chap- ter contains practical suggestions as to the use of the value drivers that underlie the creation of shareholder value in the evaluation and reward process. Chapter 9, the final chapter of the book, deals with the analyses of mergers and acquisi- tions from strategic and value-creation points of view. It includes a case study of the Quaker Oats acquisition of Stokely-Van Camp to illustrate the application of Professor Rappaport's approach to an actual acquisition. </p><p>A criticism of the book might be that it aims to achieve too much, given its length. By attempting to integrate ideas from various academic disci- plines in a relatively small number of pages, some of these ideas are not really explained enough, especially in terms of the limitations of the analy- sis techniques employed. For example, such a </p><p>This content downloaded from 195.34.79.15 on Wed, 18 Jun 2014 18:41:36 PMAll use subject to JSTOR Terms and Conditions</p><p>http://www.jstor.org/page/info/about/policies/terms.jsp</p></li><li><p>Book Reviews </p><p>criticism applies to the use of the capital asset pricing model in a multiperiod setting, a central issue in the use of net present value techniques in an uncertain environment. A further criticism, although minor, is that some terminology used might be confusing to readers acquainted with the use of similar terminology in different set- tings. Such a criticism would apply to the use of the term 'cash flow from operations' which, in the book, has a different meaning from a similar term, 'cash provided by operations,' employed in GAAP-prepared statements of changes in fi- nancial position using a cash basis. </p><p>Some of the above 'problems' possibly arise because the book is targeted at an executive audi- ence. Such an audience might not have time for academic niceties. The targeting of the book might restrict its usefulness as a textbook, at either the undergraduate or MBA levels, al- though one could imagine its use for senior-level undergraduate or second-year MBA strategic management electives. Overall, the book is inter- esting to read, if somewhat 'breathless' at times, but should certainly represent a stimulat- ing addition to executive bookshelves. </p><p>ANDREW STARK </p><p>Assistant Professor of Accounting The University of Maryland </p><p>GOKUL SINHA, Accounting Theory (Cal- cutta: Book World, 1986, pp. iv, 299). </p><p>This book follows what has over the years emerged as the conventional pattern of those with the title of Accounting Theory. Conse- quently, it can be reviewed on two levels-a general critique of that pattern and a specific assessment of the quality of argument presented in this particular book. </p><p>The book opens with a chapter on general methodological issues on the nature and func- tions of theory, a definition of accounting, and the relationship between the two. The next chap- ter presents a historical sketch of accounting and is followed by chapters devoted to various argu- ments in the literature concerning the central notions of traditional financial accounting-capi- tal, income, asset valuation, and the problems of price-level accounting. A 'speculative' issue (human resource accounting) is discussed in the last chapter. </p><p>The major criticism of accounting theory texts of this conventional pattern is that they do not present any novel accounting theory themselves. Rather they provide synopses of dominant themes </p><p>853 </p><p>in the literature and leave the student (reader) to decide which alternative is best or, worse still, to accept all as equally acceptable rationalisa- tions of very different courses of action. This approach, when used as a teaching technique, rather than leaving the student with an open, critical mind, encourages the belief that account- ing is an ill-defined discipline such that so long as the 'story is good enough,' any action can be justified. </p><p>The ontological and epistemological assump- tions in the first chapter of the book are extreme- ly conventional. There exists an objective reality, the explanation of which is the function of the- ory. The formulation of theories is claimed to be along strict positivist lines and the book perpetu- ates the artificial distinction between normative and descriptive theories. The definition of ac- countancy (p. 5) is so convoluted and general as to permit almost any human activity to be de- scribed as part of it. This creates obvious diffi- culties for the author when he attempts to relate the discussion of theory to accountancy (sic) and there are inconsistencies. For example, after pre- senting five good reasons for not accepting con- ventional accounting rules and procedures as the- ory (pp. 8-9), more than half the first chapter is devoted to describing 'the doctrines' (e.g., materiality, objectivity, disclosure) and 'assump- tions' (e.g., money measuring unit, fund con- cept, going concern) of accounting. </p><p>The second is a much more tightly and con- sistently argued chapter. The history of ac- counting is divided into four major periods: 'development' (pre-1494), 'pre-explanatory' (1495-1800), 'explanatory' (1800-1950), and 'modern' (post-1950). Despite relying heavily on the work of Littleton, the description is well presented. In addition, some examples of devel- opments in India are discussed. But it is surpris- ing to read the author's claim that 'the logic of personifying accounts' developed in India in the 1960s as 'a new idea' (p. 61). </p><p>The next five chapters are directed to discus- sion of capital, income assets, and liabilities. As indicated above, they are conventional in that in- stead of a self-consistent theory, the book merely presents the notions that have appeared in the lit- erature. Judged on that level, the book is quite satisfactory. Some of the material is what could be expected to be found in most intermediate texts; for example, the detailing of the various techniques for inventory 'valuation' and depre- ciation. There is an interesting, short discussion of intangibles and some of the problems asso- ciated with reporting them. </p><p>This content downloaded from 195.34.79.15 on Wed, 18 Jun 2014 18:41:36 PMAll use subject to JSTOR Terms and Conditions</p><p>http://www.jstor.org/page/info/about/policies/terms.jsp</p><p>Article Contentsp.852p.853</p><p>Issue Table of ContentsThe Accounting Review, Vol. 62, No. 4 (Oct., 1987), pp. 651-875Volume Information [pp.867-873]Front MatterAccounting Disclosures and the Market's Valuation of Oil and Gas Properties [pp.651-670]An Analysis of the Impact of State Income Tax Rates and Bases on Foreign Investment [pp.671-685]The Effects of the U. S. Income Tax Regulations' Transfer Pricing Rules on Allocative Efficiency [pp.686-706]The Incremental Information Content of Historical Cost and Current Cost Income Numbers: Time-Series Analyses for 1962-1980 [pp.707-722]The Incremental Information Content of Accrual versus Cash Flows [pp.723-747]NotesHistorical Analysis - A Diagnostic Tool for 'Events' Studies: The Impact of the Securities Act of 1933 [pp.748-762]The Effect of Earnings Yields upon the Association between Unexpected Earnings and Security Returns: A Re-Examination [pp.763-773]The Effects of Setting Budget Goals and Task Uncertainty on Performance: A Theoretical Analysis [pp.774-784]Pension Obligations and the Bond Credit Market: An Empirical Analysis of Accounting Numbers [pp.785-798]</p><p>Education ResearchAccounting Internships and Subsequent Academic Performance: An Empirical Study [pp.799-807]</p><p>Financial ReportingCost Accounting, Process Control, and Product Design: A Case Study of the Hewlett-Packard Personal Office Computer Division [pp.808-839]</p><p>Book Reviewsuntitled [pp.840-841]untitled [pp.841-842]untitled [pp.842-843]untitled [pp.843-844]untitled [pp.844-845]untitled [pp.845-846]untitled [pp.846-848]untitled [pp.848-849]untitled [pp.849-850]untitled [pp.850-852]untitled [pp.852-853]untitled [pp.853-854]New Books: An Annotated Listing [pp.854-859]Books Received from February 10, 1987 to May 15, 1987 [pp.860-862]</p><p>Back Matter [pp.863-875]</p></li></ul>