Determinants of the Relationship Between Strategic Performance and Shareholder's Value Creation: Beyond Financials

Abstract

Nowadays, there is a generalized consent in relating strategy with value creation. In this zeal to define value creation there was a remarkable emphasis to associate it with financials. This work pivoted between the fields of strategy and value analysis toward the assessment of determinants of shareholders' value creation. The purpose of the study was to identify what kind of relationship links strategic performance with shareholder's value creation and what its main determinants were. The research was also focused on identifying differences between determinants within and among industries and if their relative weights were different too. The final interest of this work was to assess if determinants could work as predictors of shareholders' value creation. A sample of 919 diversified listed companies in the NYSE or NASDAQ were studied along the period 1996-2005. Strategic performance was measured through Fortunes' Corporate Reputation Report attributes: quality of management, quality of products and services, financial soundness, long-term investment value, wise use of corporate assets, innovativeness, ability to attract and retain talented people, and social responsibility to the community and the environment. Compustat database was used to extract data related to shareholders' value creation as M/B ratios and shareholders' annual and abnormal returns. Findings suggested that the relationship between strategy and value analysis, far from being conceptual, is statistically significant and therefore it could be quantified. All strategic performance variables were significantly related to M/B, shareholders' annual returns and shareholders' abnormal returns, indicating collateral value creation processes to other stakeholders different than shareholders. Findings also showed that industries present different degrees of differentiation within competitors in determinants and the same differences were accounted among sectors, industry groups and industries. When the prediction power of determinants was assessed, the portfolio of top performers companies were able to explain shareholders' abnormal returns, being this fact confirmed by the empirical evidence. Implications of this study were related to strategy modeling, corporate performance measurement, market research and portfolio management. Future research was pointed in topics like customers' value creation, social responsibility and corporate value, determinants differentiation and industries' regulation, abnormal returns as value creation measurement standard and quality of management.