Chapter 1 - Shareholder Value Creation, Basic Concepts

Abstract

This chapter illustrates the basic concepts of shareholder value creation using an example of General Electric (GE) between 1991 and 2000. The equity market value of a listed company is the company's market value—that is, each share's price multiplied by the number of shares. “Shareholder value added” is the term used for the difference between the wealth held by the shareholders at the end of a given year and the wealth they held in the previous year. The shareholder return is the shareholder value added in one year divided by the equity market value at the beginning of the year. The required return to equity is the return that shareholders expect to obtain to feel sufficiently remunerated. A company creates value for the shareholders when the shareholder return exceeds the cost of equity. However, the shareholder return is often compared with other benchmarks. If the shareholder return is positive, the shareholders have more money in nominal terms than at the beginning of the year.