Shareholder Value Creation Research Articles

The SDGs: A change agenda shaping the future of business and humanity at large

The <scp>SDGs</scp>: A change agenda shaping the future of business and humanity at large

Creating shareholder value through ESG engagement

Creating shareholder value through ESG engagement

Value Creation and Investment Projects: An Application of Fuzzy Sensitivity Analysis to Project Financing Transactions

This paper presents a methodology which blends sensitivity analysis (SA) and fuzzy arithmetic for managing uncertainty in project financing transactions. Specifically, we adopt the perspective of the equityholders and use the average return on equity (ROE) to measure shareholder value creation and, in particular, the financial efficiency of the equity investment. We cope with uncertainty via global and local SA and fuzzy arithmetic; we use the fuzzy version of the well-known (global) Gamma indicator and we introduce the fuzzy versions of two (local) importance measures, the differential importance measures (DIM). We then apply them to the pro forma financial statements drawn up by the analyst for measuring and ranking the impact of the key accounting parameters on the resulting values and we show how the uncertain accounting and financial magnitudes of the project company affect the financial efficiency. Among the advantages of this analysis, aimed to enhance the managerial insights generated by the financial model and to lead to appropriate managerial actions, we focus on the attractiveness of fuzzy calculus and possibility theory to represent and compute all relevant financial data that appear in project financing and budgeting, where available information is characterized by incompleteness or nonstatistical uncertainty. In this context, fuzzy computing and appropriate SA techniques, based on application of the extension principle, allow complete investigation of the project characteristics.

Earnings Less Risk-Free Interest Charge (ERIC) and Stock Returns—A Value-Based Management Perspective on ERIC’s Relative and Incremental Information Content

This paper investigates the relative and incremental information content of KPMG’s recently developed metric for shareholder value creation: earnings less risk-free interest charge (ERIC). We assess if ERIC has a better ability to predict stock returns than earnings, cash flow from operations (CFO), earnings before extraordinary items (EBEI), residual income (RI), or economic value added (EVA). We evaluate data from 214 companies listed on the U.S. Standard &amp; Poor’s 500 Index from 2003 to 2012 (2354 firm-year observations). Similar to previous studies, we confirm that CFO and EBEI have the strongest association with stock returns in the short term, while EVA trails behind all other metrics. In terms of new findings, ERIC is the best predictor of stock returns over a 5-year period, as well as during times of crises (from 2009 to 2010). In this period, ERIC also adds incremental information content beyond that of EBEI. However, the low-short-/mid-term predictive ability of shareholder value metrics (EVA, ERIC) raises concerns regarding their reliable use in future research on shareholder value creation. We consequently propose a research agenda that focuses less on the measurement and more on the management of shareholder value.

Do Corporate Governance Mechanisms Truly Act as the Drivers of Shareholder Value in the Banking Sector in Bangladesh? Evidence from the Economic Profit Perspective

This study examines whether corporate governance mechanisms (CGMs) truly act as the drivers of shareholder value (SV) in the banking sector in Bangladesh from the economic profit perspective. The study employs a random-effects model to test hypotheses in a sample of 29 banks listed on the Dhaka Stock Exchange for the period 2014–2018. Relying on the test results of CGMs on SV measured from the economic profit perspective, this study finds that only the independent audit committee acts as a driver of truly creating shareholder value. Contrary to expectations, other CGMs in the analysis (e.g. board size, independent non-executive directors, audit committee size, audit committee meetings, and institutional shareholding) are not found to create true shareholder value. The outcomes of the study are a matter of concern for the regulatory bodies of the Bangladeshi banking sector and institutions involved in constructing the code of corporate governance, as the existing CGMs are suboptimal in the sense that they do not truly act as value-driving mechanisms for shareholder value.

Exogenous Shock in the GBE and The Effect of MNC International Diversification on Shareholder Value

This article examines the effect of international diversification on Multinational corporation (MNC) shareholder value creation in the face of an exogenous shock to the global business environment (GBE). We use the UN Climate Change Summit (COP26) as our research setting to investigate the extent to which MNC international diversification impacted shareholder value after last minute shifts in the COP26 agreement. Results from an event study analysis of 196 U.S. manufacturing MNCs indicate that international diversification is negatively related to shareholder value creation after COP26. However, MNCs with strategic orientations toward CSR and digitalization continue to create shareholder value despite high international diversification. These findings contribute novel insights to literature on GBE shocks and importance of firm strategic orientations in a turbulent environment.

Health and safety regulations and stock returns: evidence from the 1974 Swedish legislative lottery

This article provides causal evidence on a long-standing controversy in the finance and labour literature, namely, whether better health and safety in the working environment is in the best interests of firm owners. While, on the one hand, an influential strand of the literature argues that improvements in workers’ health and safety provision can increase costs and harm the market value of equity, another well-consolidated strand of the literature argues that such improvements can reduce costs and create shareholder value. It is empirically challenging to study the relation between the work environment and equity value due to their endogenous relation. To overcome this challenge, I utilize a historic natural experiment that uniquely isolates the effects of mandated investments in health and safety provision on firm market value: on 27 March 1974, the Swedish hung parliament drew a lottery ticket to decide on a legislative proposal that mandated companies to improve their employees’ work environment. The lottery resulted in the approval of the proposal. I find that this outcome led to an immediate and sizable decrease in the market value of Swedish companies that persisted for several days.

Do high-ability managers choose ESG projects that create shareholder value? Evidence from employee opinions

Do high-ability managers choose ESG projects that create shareholder value? Evidence from employee opinions

Corporate entrepreneurship and governance: Mergers and acquisitions in Europe

Mergers and acquisitions (M&A) are a form of corporate entrepreneurship involving strategic decisions that require discussion and approval by the board of directors of the acquiring firm. We focus on board attributes to analyze the entrepreneurial function of the board of directors and its involvement in corporate entrepreneurship. Building on different theories (agency theory, resource dependence theory, stewardship theory, and stakeholder theory), we examine whether board composition affects the number of acquisitions, the risk involved in bids, and the creation of value for the acquirer's shareholders. For a sample of European firms over the period 2002 to 2020, we find that board size and the percentage of external directors are related to the number of acquisitions. However, neither the percentage of women on the board nor CEO duality affects the number of acquisitions by a given firm. We also show that more risky acquisitions are associated with larger firms with a lower proportion of women directors, whereas less risky transactions are related to smaller firms where the CEO is also the chair of the board. Finally, our results indicate that firm acquisitions create value for the acquiring firm and that the market reaction is positively related to board size and CEO duality.

The Competing EU and UK Influence on Corporate Governance in Ireland Following Brexit

Company law and corporate governance in the Republic of Ireland have long been heavily influenced by developments in the UK. However, the UK’s withdrawal from the European Union raises the question whether this will continue to be the case. This article examines the historical development as well as the way forward for corporate governance and the position of shareholders in Ireland following Brexit. It is argued that the influence from global trends, such as climate change mitigation, will have a significant impact on corporate governance in both the EU and the UK. However, any changes in corporate governance may occur at a different pace in the UK and EU, where Ireland would be more under the sphere of influence of the EU. As these trends generally set out to decrease any emphasis on short-term shareholder value creation, it is likely to impact the position of shareholders in Ireland as well. corporate governance, comparative law, shareholder primacy

The impact of gender diversity on shareholder wealth: Evidence from European bank M&A

The impact of gender diversity on shareholder wealth: Evidence from European bank M&A

Tax Avoidance and Corporate Investments

This study examines the association between firms’ tax avoidance and long-term investments. We find that tax avoidance firms make greater investment than nontax avoidance firms, and that the positive association between tax avoidance and investments holds both for firms that are financially constrained, and therefore ex-ante likely to underinvest, and for financially unconstrained firms that are ex-ante more likely to overinvest. Our results further show that CEO equity incentives and governance strength exert an incremental effect on investment decisions of tax avoidance firms. In additional analyses, we demonstrate that tax avoidance firms’ investments are associated with improved future firm performance especially when those firms are ex-ante more likely to underinvest. For tax avoidance firms that are ex-ante more likely to overinvest, current investments are associated with declined future firm performance. Tax avoidance firms have higher (lower) investment efficiency in terms of improved (declined) operating profitability in the post-investment period when they have lower (higher) CEO equity incentives and stronger (weaker) governance. Overall, our results shed light on efficiency in utilizing the available cash through tax avoidance in long-term investments that might create shareholder value for a group of financially constrained firms but diminish shareholder value for another group of financially unconstrained firms.

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&amp;A) as a strategy has been used increasingly by the corporate sector to gain a competitive advantage. Mergers and acquisitions (M&amp;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&amp;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&amp;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&amp;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&amp;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

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

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&amp;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.