The Use of Shareholder Value Measure in Practice

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TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION1

Background of the study1

Research aims and objectives5

Aims5

Objectives5

Research Questions6

Definition of terms6

Dissertation layout7

CHAPTER 2: LITERATURE REVIEW8

2.1 Introduction8

2.2 Maximizing shareholders value11

2.3 Shareholder Value metrics13

2.4 Defining Value Creation15

2.5 Methods used for measuring shareholder values:16

2.5.1 Strategic profit model (SPM)17

2.5.2 Economic value-added (EVA)18

2.5.3 Shareholder value analysis:20

2.6 Examining long-term shareholder value creation20

2.7 Controlling Shareholders Regime23

CHAPTER 3: METHODOLOGY25

3.1 Introduction25

3.2 Research Methodology25

3.3 Data collection methods27

3.3.1 Interview27

3.4 Secondary sources29

3.5 Sample29

3.6 Participants29

3.7 Limitations of the study30

3.8 Ethical considerations31

3.9 Summary31

CHAPTER 4: ANALYSIS AND DISCUSSION32

Interview analysis from the share holders32

Interview analysis from the investment managers37

Discussion41

Secondary research findings41

Shareholder strategies and measures41

Cash Flow Components and shareholder value44

Increasing share holders value46

Investing on R&D48

Assets and Shareholder Value49

Capabilities and Shareholder Value50

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS53

Recommendations56

REFERENCES57

APPENDIX60

CHAPTER 1: INTRODUCTION

Background of the study

Shareholders' interests are represented by a board of directors that is responsible for overseeing the firm's management. Shareholders have three options to express their dissatisfaction with a firm: sell their shares, continue to hold their shares and attempt to influence the firm, or passively continue to hold their shares in the hope that things will improve over time (Rappaport, 1998, 35). Option two is the path chosen by shareholder activists in economies where capital markets are relatively liquid. However, activism is not costless and only shareholders with knowledge and resources can attempt to “voice” their displeasure with underperforming corporations.

Thus, many investors are choosing option two and using shareholder activism tactics to express their dissatisfaction with firm operations. On the other hand, there is some evidence that some activists such as hedge funds target firms in order to make high short-term profits from their shareholder activist tactics. Timing the market for equity has become an accepted practice and the purported benefits continue to encourage managers to employ this strategy. Equity market timing (EMT) refers to issuing equity when managers feel it is overvalued and the repurchase of equity when managers have available funds and they feel the firm's equity is undervalued. With regard to repurchases, the short-run and long-run evidence indicates that this strategy is good for the shareholders as observed from the significant increase in the stock price (Grundy, 2002, 80). This strategy falls in line with the “maximization of shareholder value” goal of an organization. There is evidence that the repurchase of equity also reduces the agency problem of free cash flow. Evaluating the benefit to the current shareholders when managers time the market for issuing equity, however, seems to be relatively more complicated because managers have an ulterior motive to issue equity. Equity issuance results in a greater level of free cash flow that managers could invest in a way that will increase their own utility. Also, the observed effect of EMT is that the issuing firm on average underperforms a benchmark (typically a matched sample of firms that do not issue equity), for three to five years after the event. The underperformance is usually measured in terms of stock returns. However, as Clark, (2000, 119) point out, conclusions drawn from the research in this ...