Shareholder Value Creation Research Articles

Do Sell‐Side Analysts Play a Role in Hedge Fund Activism? Evidence from Textual Analysis*

ABSTRACTWe investigate variation in information production by sell‐side analysts and its potential role in hedge fund activist intervention, an important external corporate governance mechanism that creates shareholder value. Using textual analysis to derive an activism dictionary from intervention objectives and tactics, we find substantially more activism content in pre‐intervention analyst reports of target firms than propensity score matched control firms. Activism content is associated with more detailed reports containing more quantitative information. Target firm intervention‐date stock returns are significantly higher when activist intention (13D) filings are supported by reports with more general and objective‐specific activism content. Of activists' public letters to stakeholders, 31.9% directly mention sell‐side analysis, amplifying the association between target returns and analyst report information. The relationship between analyst information and activism returns is robust to using brokerage closures as an exogenous shock and is consistent with analyst incentives. Activist funds with no prior disclosed position in target firms and more experienced funds capture higher returns from sell‐side information. Overall, our results suggest sell‐side analysts play a significant informational role in supporting hedge fund activism.

Implementing Enterprise Risk Management in Life Insurance

This paper discusses a framework for ERM with particular emphasis on the life insurance industry. The ERM framework involves eight key features ranging from governance aspects to risk management policy, risk tolerance, own risk and solvency assessment, capital assessment on economic and supervisory basis and continuity analysis. Given that the life insurance industry is a regulated industry the supervisory role is an important feature of the ERM framework. The paper highlights the different stages of ERM maturity starting with a compliance orientation and the highest stage with linkage to strategy and value creation. The insurance industry is currently somewhere in between but there are a lot of dijferences in the maturity of ERM within the industry. Embedding ERM is a significant challenge for the industry with quantification of economic capital, embedding risk management into decision making and dealing with operational risk being some of the primary ones that the life insurance industry is facing. Actuaries have played an important role in risk management of insurance companies for several years and their skills are well suited to take leading roles in ERM. This will however require them to not only possess technical skills but also rise to the challenge of dealing with non-quantifiable risks, change management and communication with senior management and board. ERM combines the three key elements of insurance risk, capital and value. By integrating these elements insurers are able to enhance performance assessment at a more granular level reflecting the risks underlying the business and identifying opportunities of taking more risk to create shareholder value.

Mergers and Acquisitions in the Indian Context : A Valuation Perspective for the Indian Pharmaceutical Industry

Mergers and acquisitions (M&A) as a strategy has been used increasingly by the corporate sector to gain a competitive advantage. Mergers and acquisitions (M&A) help a firm gain new customer bases, enter new markets, gain access to new technologies, and help achieve cost reduction. In today’s time, firms try to achieve synergistic gains through M&As. This study aimed to: a) understand if prices paid by acquiring firms reflected synergistic gains and b) observe value created for shareholders of the acquiring firms. The study used secondary data for the purpose of research. A neural network model was built to scrutinize the impact of the selected variables on the value of the mergers and acquisitions (M&A) deal. An event study was carried out to assess value creation for shareholders of the acquiring firm. The study found that an acquiring firm generally paid more during the M&As compared to the synergistic gains it realized post-acquisition. Additionally, there was no value creation for the acquiring firm’s shareholders. The neural network model from this study, with appropriate variables, can be used to predict the price of an M&A deal. The study will benefit the stakeholders of pharmaceutical firms to make informed decisions regarding mergers and acquisitions.

Does CEO Succession Planning (Disclosure) Create Shareholder Value?

AbstractAverage cumulative abnormal returns around proxy statements containing “in-depth” disclosures of planning for CEO succession are significantly positive indicating that succession planning is a value-added undertaking. Exploiting a quasi-natural experiment based on a 2009 SEC ruling that induced more succession planning disclosures, we find that succession planning is not value-adding for all firms. Rather, succession planning is value-enhancing for larger, more complex, and more stable firms. Importantly, CEO succession planning appears to be value reducing for smaller, simpler, and less stable firms.

How Companies Can Use Hedging to Create Shareholder Value

Assessing the performance of a corporate risk management program, and how it is expected to increase the value of the enterprise, is a difficult undertaking mainly because the costs of risk management tend to be much easier to quantify—indeed, they often appear directly on the firm's bottom line—than the expected benefits. This article provides a framework for designing and evaluating corporate risk management and hedging programs.The author begins by discussing how to evaluate the benefits and costs of a risk management program in general terms, and then focuses more directly on the assessment of corporate hedging programs, which are generally conducted with derivatives. In practice, there are many obstacles to designing and carrying out a successful hedging program. But one of the most common has been the tendency of top managements to insist that hedging programs be “costless.” The author argues that just as the purchase of fire insurance is not viewed as a waste of funds or “bad investment” if the insured house does not burn down, the use of derivatives in a well‐designed hedge should not be viewed as a mistake if the deriv ative position produces losses.To guard against this mistake, the people who design and implement risk management strategies must ensure that their CEOs and boards understand the possible outcomes of the strategy—including losses on derivatives position—and how the strategy itself increases the (expected) value of the firm. Further, management should attempt to communicate the principles underlying its risk management program and the value created by its hedging strategy to the investment community.

Why do companies become hedge fund targets? Evidence from shareholder activism in Germany

Regulatory changes in Germany since the beginning of the new millennium shifted corporate control activities from banks to capital markets. Hedge funds exploited these governance changes by acquiring equity stakes in weakly governed firms, which subsequently outperformed, except during the global financial crisis. For 653 shareholder activism events over the period 2000–2020, we observe that hedge funds are more likely to target smaller firms with less ownership concentration, with higher financial visibility, higher sales growth, higher profitability, lower leverage, greater diversification and higher institutional ownership. Although hedge funds became less aggressive, the optimal strategy protecting management against activism is to create shareholder value.

LEAN Management Tools Implementation for the Impact Study in the European Foundation for Quality Management Model Score

The main objective of this article is the description, analysis and explanation of the development of an integrated management model, supported by the LEAN management tools, for manufacturing companies that worked along the time on a mass production basis. The methodology used was the integration of a model supported by the EFQM—European Foundation for Quality Management system, with the principles, tools and indicators of the LEAN management tools. The fundamental discoveries found in the analysis and application of the case study are located in four fundamental aspects, related to the definition of a purpose for the company, the clear and correct description of the business processes involved, the involvement of people and teams and the application of a thought of continuous and permanent improvement. From the point of view of added value for organizations, we understand that the levels of productivity, competitiveness and value creation for shareholders are the increasingly important elements of action, and the promotion of the implementation of models that promote cost reduction and increased product quality levels are absolutely essential. The recommendations are for the implementation of new management philosophies based on the integrated behavior of continuous improvement, reduction of waste in processes and activities and constant monitoring of results through the correct application of management indicators.

Performance pay sensitivity: Do top management incentives align with shareholder value creation?

Arising from the principal-agent consideration, Jensen and Murphy (1990b) studied the pay-performance sensitivity (including pay, options, stockholdings, and dismissal) for chief executive officers (CEOs) in the 1980s. They found that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. In this study, we revisit the issue of the linkage between CEO pay and performance but with the difference that we only include observable measures in the pay-performance sensitivity estimate. Our data on executive compensation stems from the ExecuComp database on S&P 1500 firms, and the performance data from the Center for Research in Security Prices (CRSP) database (total: 23,737 firm-year observations). We find that CEO wealth changes $5.34 for every $1,000 change in shareholder wealth. Almost all of this sensitivity is attributed to compensation through stock options and the CEO’s inside stockholdings. Today, the incentives generated by stock options have increased thirteen times, and the total pay-performance sensitivity has almost doubled in value, compared to when Jensen and Murphy (1990b) estimated the pay-performance sensitivity in the 1980s for the first time. Despite the increased pay performance sensitivity, we hypothesize that internal and external political forces negatively affect the CEO’s performance incentives. Compensation constraints reduce the pay performance sensitivity and hereby the incentives for the CEO to maximize shareholder wealth. Further research on how CEO wealth varies with absolute and relative corporate performance is required to determine if the CEO’s incentives are consistent with shareholder wealth maximization.

A Mathematical Programming Approach to Supply Chain Network Design considering Shareholder Value Creation

One of the main goals of supply chain management is to ensure proper flows of products and information through all nodes to supply them in the right place at the right time. To achieve this objective, it is very important to consider flows of products and finances among supply chain nodes. Traditionally, operational and financial processes have been optimized as separate problems. The developed model addresses the problem of designing a supply chain network and tries to integrate both areas of operations and financial aspects to maximize the value created and measured by the Shareholder Value Analysis (SVA). The results show that with appropriate financial decisions, creating more value for the company and its shareholders is achievable. The developed model with a new financial approach is able to improve the total created shareholder value as much as 0.7% larger than the SVA obtained without financial aspects and 0.93% larger than the value created by the basic model. The main reason for an increase in value creation is due to new operational and financial aspects, which mainly show the possibility of closing facilities and bank debt repayments. To validate and show the applicability of the proposed model, it was solved by GAMS‐BARON solver with data provided from the literature. Sensitivity analyses on financial parameters were performed to evaluate the results.

When Blockchain Creates Shareholder Value: Empirical Evidence from International Firm Announcements

Blockchain is a prominently discussed technology in operations and supply chain management and firms increasingly engage in blockchain initiatives. Yet, an understanding of the technology's financial value remains elusive. Based on 175 firm announcements between 2015 and 2019, we conduct an international event study to estimate the impact of blockchain initiatives on the market value of the firm. We empirically demonstrate that blockchain announcements are associated with a significant average abnormal return of 0.30% on the announcement day, and that there are indications of positive long‐term effects on shareholder value. We further demonstrate how blockchain use case, project, and firm characteristics affect the stock market reaction. Specifically, we find that the stock market reaction to blockchain announcements is less positive when blockchain is used to trace physical objects or to share sensitive data, providing empirical evidence for the risk associated with current challenges in the design of blockchain use cases. Our results also suggest that the involvement of an external information technology service provider in a blockchain project attenuates the positive stock market reaction. Interestingly, more innovative firms do not experience a stronger stock market reaction to blockchain announcements. Leveraging the international scope of our sample, we further shed light on how the firm's competitive (i.e., industry factors) and macro environment (i.e., country factors) affect the stock market reaction. Our findings indicate that the industry's R&D intensity and the country's data restriction level play a crucial role in driving the value attributed to blockchain initiatives.

Impact of financing and payout policy on the economic profitability of solar photovoltaic plants

This paper introduces an innovative comprehensive evaluation model for appraising an investment in a solar photovoltaic plant which encompasses both operational and financial management. We illustrate the intricate network of logical relations among technical (estimated) variables and financial (decision) variables and show that establishing transparent links between the former and the latter enhances the accuracy and soundness of the model. The results indicate that understanding the conceptual and formal relations of operating variables and financial decisions is necessary for correctly measuring shareholder value creation and making rational decisions, even for those projects (such as solar energy projects) where the operating, technical component is of paramount importance. We show how a firm's decision of replacing conventional energy with solar energy may be affected by managerial decisions regarding the firm's payout/retention policy and its financing policy to support the project. The model discloses insights on how to fine-tune the financing and distribution decisions in order to maximize the value creation for shareholders. We apply the model to a real-life photovoltaic project to be located in the province of Modena, in Northeast Italy, and quantify the effect of financial decisions on the project's net present value, showing that the financing and distribution policies may amplify or shrink the impact of changes in other inputs and may even revert an otherwise unprofitable project into a value-creating one. Finally, we allow operational variables as well as financial variables to change in order to measure their importance via the application of the Clean Finite Change Sensitivity Indices (Magni et al., 2020).

Determinants of Share Value Creation among Listed Companies in the Frankfurt Stock Exchange, Germany: Literature and Theoretical Examination

The main purpose of any firm is to enhance its shareholders’ wealth. Investors, management and other stakeholders need to be aware of the company’s performance to enable them make informed decisions about the future. The creation of shareholder value is becoming increasingly challenging as owners and managers are forced to make appropriate financial decisions that contribute to the management of operations that create value and also identify activities that destroy value. In addition it is necessary to implement effective instruments which are able to evaluate real value created. Value creation occurs in a company when its business is able to generate returns above the demands of investors or returns of capital invested are more than the cost of a company’s capital. Most financing decisions are dictated by necessity which requires in-depth analysis of financing options, costs attracted and long-term implications. A firms’ shareholder value creation is based on firms’ earnings ability and firms return on its net worth. A firm financing policy may be to choose from alternative sources, which may be internal or external. Internal financing includes use of retained earnings while external financing constitutes borrowing by issuing debt instruments and issue of new shares. The skills to identify financial variables which have the greatest impact on value creation in an organization can facilitate establishment of criteria for appropriate strategies. The study found that the main measures to quantify shareholder value creation in Germany financial sector and among listed companies are earnings per share (EPS), return on equity (ROE), return on assets (ROA) and dividend per share (DPS). the determinants of value creation were found to include growth rate, operating profit margin, income tax rate, working capital investment, fixed capital investment, cost of capital and value growth duration. The study recommends that the regulatory authorities in German financial sector particular should design a policy that will motivate building materials firms to be paying dividend to their shareholders on regular basis. This will increase the shareholders' value due to the nature of relation between the variables which is positive.  Keywords: Share, Value, Creation, Listed companies, Frankfurt, Stock, Exchange.  

The Role of Deferred Equity Pay in Retaining Managerial Talent*

ABSTRACTWe examine the extent to which deferred vesting of stock and option grants (deferred pay) helps firms retain executives. To the extent an executive forfeits all deferred pay if they leave the firm, deferred vesting will increase the cost (to the executive) of an early exit. The impact of deferred pay on executive retention, a key ingredient for firms to create shareholder value is hence an important empirical issue. Using pay duration proposed in Gopalan et al. (2014) as a measure of the extent of deferred equity, we find that CEOs and non‐CEO executives with longer pay duration are less likely to leave the firm voluntarily. The talent retention role of deferred pay is mitigated by performance‐vesting provisions and signing bonuses offered by industry peers. Moreover, we also find that voluntary turnover is less sensitive to pay duration for executives who are perceived to be more talented and have more firm‐specific skills. Overall, our study highlights a strong link between compensation design and turnover of top executives. It suggests that firms take into account the need for retaining managerial talent in designing executive compensation.

Corporate Social Irresponsibility of African Firms Across the Continent

Within the context of Africa, the prevalence of poor institutional environments and its prioritisation of economic responsibilities create simultaneously the need for more socially responsible business practices, and the risk of more socially irresponsible episodes to be discovered. Despite there have been documentations of corporate social irresponsibility (CSI) (e.g. tax evasion, human rights abuse and bribery), there appears to be a lack of research quantitatively assessing the impact of CSI on shareholder value across the African continent. From the lens of stakeholder theory, expectancy violations and institutional voids, we argue that the interrelationship between stakeholder expectations, power and interests is of primacy to the firm and can exert influence on firms’ economic role in creating shareholder value in the macro environment. Using a large sample of 865 African companies across the only emerging markets in Africa (Egypt and South Africa) and representative frontier markets (Kenya and Nigeria) during 2009-2016, we find that firms avoiding CSI earn higher returns and the penalty for CSI is higher in countries with stronger institutional environments. The findings imply for investors and managers that even in the context of weak institutions, adherence to basic moral principles (i.e. avoiding bad) appear to be good business practice.

Impact of learning through credit and value creation on the efficiency of Japanese commercial banks

This study investigates the learning curve of commercial banks regarding the efficiency of credit and value creation. However, current empirical methods for accessing the learning curve in organizations are not suitable for use in financial institutions. Considering bank-specific characteristics, we introduce a dynamic learning curve using a cost function adjusted to capture learning-by-doing in banks. Using the model, we test several hypotheses on the impact of bank intermediary experience (learning) on the efficiency of credit and value creation in Japanese commercial banks. The findings show that bank intermediary learning significantly improves the cost efficiency gain in the gross value created, total credit created, and investment. However, bank intermediary experience has no significant effect on the efficiency of the economic value created for all the banks analyzed. These findings have practical implications for evaluating cost dynamics in bank credit and value creation, risk management, lending to the real sector, and shareholder value creation.

Intellectual capital and dividend policy: the effect of CEO characteristics

PurposeThe paper aims to empirically test the impact of intellectual capital (IC) on a firm's dividend policy. Further, the authors investigate the moderator effect of Chief Executive Officer's (CEO) characteristics (gender, age and education) on this relationship.Design/methodology/approachThe research was carried out on the main Chinese listed companies reported on the CSI 100 Index from 2016 to 2018. To assess the impact of IC on the dividend policy and then the moderating effect of the characteristics of the CEOs, the authors used a fixed effects panel data analysis.FindingsThe results suggest a positive impact of IC on dividend policies. In addition, this relationship is enhanced when the CEO is a woman, and the lower the age the higher the effect is.Originality/valueTo the best of the authors' knowledge, this is the first empirical study that explores the effect of IC on a firm's dividend policy in an emerging country. Specifically, this paper demonstrates the impact that IC has on the creation of shareholder value. Furthermore, considering the characteristics of the CEOs, this study tests new moderating effects in the relationship between IC and value creation and highlights how IC, dividends and CEO characteristics can be useful in aligning interests between ownership and management, enriching the debate on agency theory.

Shareholders’ greed and corporate value growth

Abstract This article investigates whether companies with a higher payout ratio make fewer investments, to evaluate how firms make their decisions about corporate value creation. Furthermore, it examines how this yearning for dividends and the corresponding earning distribution affect the value creation for the shareholders in the long term. The findings show that companies with a higher level of dividends make fewer investments and deliver a lower return for shareholders. Higher levels of dividends generally imply a lower amount of resources to reinvest, negatively affecting long-term growth investing. Overall, the main insight is that the investor’s “greed” and appetite for short-term results (in forms of dividends), drove a lower performance and creation of value for the same shareholders. The companies more oriented to the long term, in terms of investments and growth, reached a superior value.

ESG Importance for Long-Term Shareholder Value Creation: Literature vs. Practice

This article aims to detect how ESG adds value to the long-term shareholder value creation and to discover whether businesses are aware of positive ESG effects and, therefore, whether they will become more ESG-conscious. By conducting a qualitative content analysis on the academic literature, this article firstly aims to determine if shareholders’ value is positively affected by corporate ESG awareness. Secondly, to test whether companies are becoming more conscious about the importance of ESG, the mission statements of publicly listed Central and Eastern European (CEE) companies are compared to their decade-old versions. This analysis allows us to conclude on whether companies have shifted their attention to the ESG factors as a part of their purpose of existence and, therefore, for long-term shareholder value creation, which is one of the main goals of the exchange-listed enterprises. The content analysis results show that companies with higher sustainability awareness ensure shareholder value creation via improved financial performance, management quality as well as reduced risk metrics. Additionally, qualitative nonfinancial factors such as reputation, stakeholder trust, employee satisfaction and engagement provide an even more significant effect on the long-term value than the pure financial matters. The theoretical trend is found to be supported by the fact that sustainability practice and consumer-oriented keywords dominate the mission statements of CEE companies, while keywords related to shareholders and profit experienced the most significant decrease from 2012 to 2021. The present research is unique as it looks at how companies tend to become more ESG aware, integrating the sustainability perspective into their mission statements in response to the global sustainability trend.

Integrated thinking, earnings manipulation and value creation: Malaysian empirical evidence

PurposePrior literature proposes that integrated reporting (IR) drives integrated thinking (IT), enabling an organisation to create value for stakeholders in both quantitative (economic performance) and qualitative manners (beyond financially-oriented information). Fraud triangle theory also predicts that earnings manipulation may also affect the creation of value. Thus, this study seeks to provide empirical evidence on the relationship between IT, earnings manipulation and value creation.Design/methodology/approachThis data sample comprises of 497 observations from 2014 to 2018 of the top 100 market capitalisation of Malaysian public listed companies (PLCs) in Bursa Malaysia. This study used an index score for IT variable and Beneish’s M-score as a proxy to detect earnings manipulations and to classify the companies into non-manipulators and manipulator companies. Value creation measurements consist of four variables under shareholder's value creation and one variable represents value creation through innovation.FindingsThe findings show that IT is significantly related to value creation, whereas earnings manipulation had no significant relationship with value creation except for value creation measured using Tobin's Q ratio. The alarming finding is that a fraud predictor, namely earning manipulation, measured by Beneish-M, is not a predictor of whether companies are creating better or less value.Originality/valueThis study is among the early literature that provides empirical evidence of the relationship between IT and value creation. Furthermore, this paper adds to look at the association of earning manipulation and value creation.

Política de Dividendos e Períodos de Recessão: Evidências no Mercado de Capitais Brasileiro

Objetivo: Observar o comportamento da distribuição de dividendos das empresas listadas na B3, comparando os períodos de expansão e de recessão na economia brasileira.Método: Foram realizados dois modelos de dados em painel, o qual contaram com o índice payout e com o índice dividend yield como variáveis dependentes e uma dummy classificada como 1, para os anos em que houve recessão econômica e 0 para os anos em que houve ascensão econômica, como variável independente. Além disso, foram acrescentadas ao modelo, as variáveis de controle alavancagem financeira, tamanho e o lucro por ação.Originalidade: O estudo abordou a distribuição de dividendos de acordo com o ciclo da economia brasileira, o que torna a pesquisa original, uma vez que não foram encontrados estudos semelhantes.Resultados: Independentemente da proxy de distribuição de dividendos utilizada, as empresas aumentam a distribuição de dividendos em períodos de recessão, quando há maior incerteza no mercado. No que tange às variáveis de controle, para o modelo estimado utilizando a proxy índice payout, apenas a alavancagem financeira não se mostrou significante, enquanto o tamanho e o lucro por ação foram positivamente significantes. No modelo que tem a proxy dividend yield como variável dependente, o lucro por ação não se mostrou significante, ao passo que a alavancagem financeira e o tamanho se mostraram negativamente correlacionadas ao dividend yield. Contribuições: Identificação do aspecto economômico na política de dividendos das empresas brasileiras e na criação de valor para os acionistas em períodos de recessão econômica.