Shareholder Wealth Maximization Research Articles

Dividend Policy and Share Price Volatility Among Insurance Companies Listed at Nairobi Securities Exchange

The major objective of any firm is to maximize the shareholders wealth. This is evidence through dividend yield and payout ratio and this encapsulate into the dividend policy of a company. The research purpose aimed at examining the influence that dividend policy has on the volatility of share prices among the listed insurance corporations in Kenya. Research design, approach and method: Data was collected from listed insurance corporations over a 10-year period with a total of 49 data points. The Pearson correlation and ordinary regression analysis were employed. The results reveal the existence of a positive link among the study variables. The correlations were found to be substantial at ninety-five percent confidence level. It is worth noting that the model summary shows forty-three-point one percent of changes in the volatility of stock price are explicated by dividend yield and payout ratio. ANOVA statistics which examines whether the analytical model as set out in the study explains variations in the dependent variable concluded that the model is analytically substantial. The outcome revealed a statistically significant positive link between stock price variations and the ratio of dividend payout. Research also established a statistically substantial negative interrelation between volatility of stock prices and dividend return. Results therefore recommend that companies should have dividend policies which are mapped to shareholders wealth maximization objective. The study suggests further studies be undertaken to determine whether there exists an analytically substantial difference between the dividend policies of various sectors in the economy.

Making Corporate Social Responsibility Pay

Commentators inside and outside of legal academia have urged corporations to use their outsized power to benefit society. But this advocacy is unlikely to alter corporate decisionmaking to the desired extent because shareholder wealth-maximization has become ingrained in the corporation’s incentive structure. This Essay therefore charts a new course. It discusses developments in financial instruments that make funds available for prosocial corporate activity, and shows how such instruments, with a few alterations, could dramatically induce corporations to prioritize stakeholder goals. More specifically, the Essay proposes that individuals use “corporate social responsibility bonds” to offset costs associated with prosocial corporate decision-making. The intuition behind these instruments is grounded in law and economics theory: if it is welfare-maximizing for individuals to see corporations make public-interested choices that are not wealth-maximizing, there should be a possible Coasian bargain between those individuals and the corporation. In such situations, an issuer could create a bond to finance a predetermined public-interested corporate decision, thereby turning stakeholders into creditors with governance rights. Any individual who values the decision more than its cost could participate. To provide an incentive to depart from wealth-maximization, the bond would stipulate that their contribution would be forgiven if the decision was implemented—a key difference from existing prosocial financial instruments. More broadly, the insight that the individuals with the strongest interest in seeing corporations pursue corporate social responsibility goals are not always the company’s shareholders has consequences for corporate law and corporate governance. In particular, it cautions that we should recognize the limits of corporate law and shareholder activism to achieve socially optimal levels of corporate responsibility. The more difficult question is whether and how to reorient our corporate law system away from shareholders and toward other constituencies. As that project forges on, this Essay proposes action that could allow individuals to influence corporate behavior without any delay—one decision at a time.

Federalizing Bank Governance

Congress and federal financial regulators have long prioritized the safety and soundness of banking firms. But at the same time, the directors and officers of banking firms are legally bound to prioritize shareholder wealth maximization, which creates incentives for risk-taking that work against these regulatory goals. This shareholder primacy norm has long been a central feature of corporate governance, but as I describe in this Article its application to banks was not a deliberate policy choice but rather a historical accident. Indeed, banks possess several unique features that make shareholder wealth maximization an inapt governance priority for them. Banks are highly leveraged, which increases the importance of creditor agency costs. Banks also enjoy government guarantees, either explicit or implicit, on their short-term debt, and thus their governance is a matter of public concern. Finally, bank failures result in high negative externalities, and this also creates a strong public interest in bank safety and soundness. This Article argues that a new federal governance regime for banking institutions is appropriate and consistent with the historical purposes of banking regulations and charter oversight in the United States. Furthermore, such a regime would reduce the tensions between the law of state entities and the sprawling federal banking regulatory framework created by Congress, and harmonize the internal governance of banking firms with the broader goals of external banking regulations. Finally, I offer some thoughts on the key principles that should be present in any such federal governance regime for banking. For too long, we have tolerated a “cat-and-mouse” dynamic in banking, one in which regulators have sought to identify and address risky practices while knowing that the directors and officers of banking firms have strong incentives to take on higher risk. By changing this paradigm and realigning the incentives inherent in banking governance, we can take a major step towards ensuring long-term stability in our financial system.

The Impression of Corporate Social Responsibility (CSR) on Corporate Financial Performance (Cfp) & the Concept and Role of Agency Theory

The primary goal of an organization/company need to maximize its owners’ value, but a proprietor’s goal could be quite different. Consider Larry Jackson, ‘The proprietor of a neighborhood sports equipment stock. Jackson is in business to generate money, but he likes to require time without work to play golf on Fridays’’. He also incorporates a rare employee who aren't any longer very productive, but he keeps them on the payroll out of friendship and loyalty. Jackson is running the business in a very way that's in step with his own personal goals. He knows that he could make more cash if he didn’t play golf or if he replaced a number of his employees. But he's comfortable along with his choices; and since it's his business, he's liberal to make those choices. In contrast, Linda Smith is CEO of an over-sized corporation. Smith manages the company; but most of the stock is owned by shareholders who purchased it because they were searching for an investment that might help them retire, send their children to varsity, acquire a long-anticipated trip, so forth. The shareholders elected a board of directors, which then selected Smith to run the corporate. Smith and also the firm’s other managers are engaged on behalf of the shareholders, and that they were hired to pursue policies that enhance shareholder worth. Throughout this book, we focus totally on publicly owned companies; hence, we operate the belief that management’s primary goal is shareholder wealth maximization. At the identical time, the managers know that this doesn't mean maximize shareholder value “at all costs.” Managers have a responsibility to behave ethically, and that they must follow the laws and other society-imposed constraints that we discussed within the opening vignette to the current chapter. Indeed, most managers recognize that being socially responsible isn't inconsistent with maximizing shareholder value. Consider, for instance, what would happen if Linda Smith narrowly focused on creating shareholder value, but within the process, her company was unresponsive to its employees and customers, hostile to its area people, and indifferent to the consequences its actions had on the environment. Altogether likelihood, society would execute a large range of costs on the corporate. It’s going to find it hard to draw in top notch employees, its products could also be boycotted, it should face additional lawsuits and regulations, and it's going to be confronted with negative publicity. These costs would ultimately cause a discount in shareholder value. So clearly when taking steps to maximize shareholder value, enlightened managers have to also mind these society imposed constraints. It’s at now where the researcher spreads an application of literature review onto testing Corporate Social Responsibility and its IMPRESSION on Financial Presentation. Subsequently, the researcher also stresses on the importance and implications of agency theory within the context of monetary management.

Shareholder Primacy in Benefit Corporations

The goal of the business corporation traditionally has been understood to be the maximization of shareholder wealth. A growing demand for social enterprise has led to the creation of various new forms of business organization, including the benefit corporation, that have the goal of creating both shareholder wealth and other public benefits. Although benefit corporations were developed to overcome the shareholder wealth maximization norm, it is not fair to say that they also overcome shareholder primacy. Properly understood, benefit corporations are shareholder-centric: they exist to allow shareholders to pursue altruistic goals rather than to require them to do so. This essay demonstrates this from the history and structure of the Model Benefit Corporation Act and argues that benefit corporation legislation ought to remain essentially enabling rather than mandatory in nature.

Shareholder Wealth Maximization and Investment Decisions of Nigerian Food and Beverage Companies

Abstract The study examines the effect of shareholder wealth maximization on investment decision in food and beverage companies listed in Nigeria. To achieve this, seven listed food and beverage companies were selected. The research adopted an ex post facto research design, while purposeful and stratified sampling techniques were used to select seven out of the fifteen companies in the food and beverage subsector. Data for the study were extracted from the annual reports and accounts of the sampled companies from 2008–2017. The result obtained from the regression analysis reveals that earnings per share and market price per share have no significant positive effect on investment decisions, while dividend per share was found to have no significant negative effect on investment decisions. In effect, the study concludes that the unique combination of the identified proxies for shareholder wealth maximization have jointly a significant positive effect on investment decisions. Arising from this, the study recommends that food and beverage companies should improve more on earnings per share, dividend per share, and market price per share so as to attract more investment from shareholders.

Catering and dividend policy: evidence from the Netherlands over the twentieth century

This article investigates the determinants of Dutch firms’ dividend policies in the twentieth century. We identify three distinct episodes and document shifts in dividend policies in the 1930s and 1980s, because firm managers cater to the changing preferences of shareholders. The first episode, prior to World War II, was characterised by dividends that were fixed contracts between shareholder and management and the payouts were mechanically determined by earnings. The second epoch of Dutch dividend policy, until the 1980s, was characterised by dividend smoothing. Dividends were still strongly related to earnings, but because of shareholder's preferences for stable dividend income, earnings changes are incorporated in dividends with a lag. Finally, dividend policy in the most recent episode is inspired by shareholder wealth maximisation, based on agency and signalling motives. In this period, dividends have become largely decoupled from earnings.

A primer on sustainable value creation

AbstractThis paper argues that the current paradigm of value creation has led to a number of unacceptable outcomes. Exaggerated by executive compensation incentives focused on short‐term results, the model of shareholder wealth maximization spurs short‐term profits that fail to take into account those costs that are externalized to other stakeholders. We argue that the all‐inclusive costs can far exceed those explicitly accounted for and that their magnitude is often such that it outweighs the short‐term gains by a wide margin. The cascading nature of these costs, the growing voice of other stakeholders in support of their interests, the erosion of public trust, and the increasingly dire state of the global environment have accelerated the pace of calls for the adoption of a model of sustainable value creation—one in which shareholders’ wealth is maximized without making any of the other stakeholders significantly worse off. Taking an exploratory step toward developing such an ideal process, we present a simple example of a valuation model that incorporates such a principle. We also argue that markets, education, and regulation represent the three indispensable cornerstones of a sustainable value creation framework.

Foreign ownership and capital structure dynamics

This study explores the relationship between foreign investors and the dynamics of capital structure. Using a sample of listed firms in Taiwan during the period from 1997 to 2016, our results reveal that firms with higher foreign ownership are less likely to issue debt, indicating that foreign investors serve as a direct substitute for debt by enhancing corporate governance. Moreover, foreign investors help reduce leverage adjustment costs, which in turn increases the speed of adjustment toward target leverage. Overall, this study highlights the important role played by foreign investors in shaping firms’ optimal capital structure decisions and shareholder wealth maximization, and thus provides evidence in supporting a positive view of foreign ownership in emerging markets.

Now is the Time to Designate Proxy Advisors as Fiduciaries Under ERISA

Now is the time to designate proxy advisors as investment advice fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA). Such a designation is not only necessary to correct long standing concerns, but also to make sure voting recommendations are in compliance with the sole objective required by ERISA, shareholder wealth maximization (SWM). Utilizing voting recommendations that do not have SWM as their objective, e.g., utilizing Environmental, Social, and Governance (ESG) objectives, would be in direct conflict with the fiduciary duties of an ERISA plan manager when managing the shareholder voting rights of a plan. Being designated an investment advice fiduciary under ERISA would require proxy advisors, like plan managers, to be constantly guided by fiduciary principles in the creation of their voting recommendations for ERISA plans. These fiduciary principles include making decisions solely in the interest of the participants and beneficiaries of the plans with the exclusive purpose of providing benefits to them, and the application of the prudent man standard to proxy advisor actions. The investment advice fiduciary designation would also require proxy advisors to consider, without exception, SWM as the fiduciary objective when creating voting recommendations for ERISA plan managers. This means that ESG objectives cannot creep into these voting recommendations. To explain why this is so, a substantial portion of this Article is devoted to explaining how ESG interacts with the fiduciary duties of ERISA.

The Case for Maximizing Long‐Run Shareholder Value

Criticism of the shareholder model of corporate governance stems in part from misunderstanding about what shareholder wealth maximization means for the other stakeholders of public companies. The corporate goal of shareholder wealth maximization does not imply that such stakeholders “do not matter.” Managers maximize shareholder value by maximizing the total expected cash flows available to distribute to all of their stakeholders. To maximize such cash flows, managers must provide their customers with desirable goods and services at attractive prices—which in turn requires that managers attract the employees, suppliers, and financial capital needed to conduct their businesses by providing each of these groups with market‐determined returns on their contributions to firm value. In this way, successful corporations benefit all of their stakeholders, and what is good for the corporation is generally good for society.External forces such as the media and government exert considerable influence on corporate actions and, in so doing, they play a role in helping to limit negative corporate “externalities” such as pollution and climate change. But direct regulation of productive activities should be used sparingly, and subjected to ongoing cost‐benefit analysis. Government regulation replaces the collective decisions of a broad marketplace of stakeholders using their own resources to act in their own interests with decisions made by government officials with complicated incentives and using resources generated by others. More generally, government should seek to regulate corporate actions only in the limited situations in which there are no market solutions for reducing the effects of externalities. For example, government plays a critically important role in identifying and deterring corporate fraud, and in ensuring competition and a level playing field for companies and all their stakeholders.

Corporate Governance, Corporate Social Performance, and New Product Introductions

A dominant stream of research has linked a firm’s innovation capacity to its shareholder orientation (SHO), pertaining to how effectively corporate governance mechanisms maximize shareholder wealth...

The relationship between the components of the capital structure and the company's economic value added at different stages of the life cycle of listed companies in Tehran Stock Exchange

The most important decisions of corporate managers are their capital structure decisions. These decisions have a direct impact on the value of the company and maximize shareholder wealth. Economic Value Added is a new way of evaluating performance which in recent years has been a lot of attention as effective as a method of measuring corporate value and shareholder interests is reflected. However, the value added of different companies with different earnings even if they are similar. On the other hand, based on the life cycle hypothesis stages of life, including birth, infancy, growth, maturity and decline. Thus, it can be argued that the decisions of external financing (debt - equity) will be affected by a critical stage in which the company. Methodology: The aim of this study was to investigate the association between firms' capital structure with EVA considering the period of life that is in the period 2008-2013 and for 1452 year is now. Results: To test the hypothesis of multivariate regression analysis using panel data. Conclusion: The results indicate the existence of external financing priority on growth, maturity and decline stage is the absence of this priority.

Enhancing the Value of Shareholder Voting Recommendations

Investment advisers to mutual funds, exchange-traded funds, and separately managed accounts are typically delegated the authority to vote their clients’ securities. When this delegation occurs, these investment advisers have a fiduciary duty to vote their proxies, typically the voting rights associated with a company’s common stock, in the best interest of their clients. This duty creates the following corporate governance issue: How can these investment advisers become informed voters without requiring them to read massive amounts of information on the hundreds or thousands of companies they have invested in for the thousands, tens of thousands, or even hundreds of thousands of shareholder votes they are confronted with each year? A critical step in resolving this issue is maximizing the ability of investment advisers to avail themselves of voting recommendations that are made on an informed basis and with the expectation that they will lead to shareholder wealth maximization. One way to achieve this maximization is for the SEC to recognize the value of board recommendations and explicitly state that their use will allow investment advisers to meet their fiduciary duties when voting their proxies. Another way is to make sure that the voting recommendations provided by proxy advisors are truly informed ones. This leads to the recommendation that the proxy advisor should be held to the standard of an information trader.

Cross‐Country Variation in the Effectiveness of the Media's Corporate Governance Role: Decision to Abandon Value‐Destroying Acquisition Attempts

AbstractI examine the cross‐country variation in the effectiveness of the media's corporate governance role. I find this role to be more effective in countries with greater societal trust or concern for shareholder wealth maximization. In those countries, news coverage of value‐destroying acquisition attempts leads to a higher likelihood of acquisition abandonment. By contrast, the effectiveness of the media's governance role does not vary directly with the status of local media freedom. The results imply that a society's shared values, such as trust or concern for shareholder wealth maximization, play an important role in the media's watchdog function.

The role of dividend policy in share price volatility

Orientation: A key objective of a company is to maximise shareholder wealth. Distribution of created wealth is achieved either through reinvestment in the company, which increases share value, or through dividend payouts. This encapsulates the dividend policy of a company. In order to realise a cash return, the former requires an investor to liquidate part of the investment, while the latter provides an immediate cash return.Research purpose: The objective was to establish whether relationships exist between share price volatility and dividend policy for shares listed on the Johannesburg Stock Exchange Limited (JSE).Motivation for the study: Dividend policy is an important consideration in the wealth creation process, particularly whether or not to distribute dividends to shareholders. Dividend policy is often structured to cater for shareholders’ expectations.Research design, approach and method: Panel data analysis was employed on a sample of the top 40 JSE-listed shares from 2007 to 2016.Main findings: The results indicated that the association between share price volatility and dividend yield is positive and significant but that between share price volatility and payout ratio is insignificant.Practical/managerial implications: Dividends were proven to be relevant to shareholders and have an association with share price volatility.Contribution/value-add: Dividend policy for the top 40 companies listed on the JSE is a contributor to share price volatility. In order to minimise share price volatility, managers of dividend-paying companies should structure the dividend policy to have consistent dividend payments but also able to reinvest excess cash within the company.

Catering and Dividend Policy: Evidence From the Netherlands Over the Twentieth Century

This paper investigates the determinants of Dutch firms’ dividend policies in the 20th century. We identify three distinct episodes and document shifts in dividend policies in the 1930s and 1980s, because firm managers cater to the changing preferences of shareholders. The first episode, prior to the Second World War, was characterized by dividends that were fixed contracts between shareholder and management and the payouts were mechanically determined by earnings. The second epoch of Dutch dividend policy, until the 1980s, was characterized by dividend smoothing. Dividends were still strongly related to earnings, but because of shareholder’s preferences for stable dividend income, earnings changes are incorporated in dividends with a lag. Finally, dividend policy in the most recent episode is inspired by shareholder wealth maximization, based on agency and signalling motives. In this period, dividends have become largely decoupled from earnings.

The use of poison pills by US firms over the period 1997-2015: what has been their impact on shareholder value

Poison pills are controversial devices for which no common conclusion as to how the market reacts to their adoption exists. This research collates 4,479 poison pill adoption events by US companies over the period 1997-2015. Statistically significant insights and positive abnormal returns were found on the day the poison pill was adopted. It is for this reason that we argue in favour of the shareholder wealth-maximisation hypothesis, stating that poison pills protect shareholders by providing management a superior bargaining position. The shareholders react positively to poison pill adoption, particularly if a hostile takeover attempt is anticipated. Furthermore, shareholders seem to value the protective effect of the device, which both provides management a superior bargaining position and allows the maximal possible bid premium to be negotiated.

The use of poison pills by US firms over the period 1997-2015: what has been their impact on shareholder value

Poison pills are controversial devices for which no common conclusion as to how the market reacts to their adoption exists. This research collates 4,479 poison pill adoption events by US companies over the period 1997-2015. Statistically significant insights and positive abnormal returns were found on the day the poison pill was adopted. It is for this reason that we argue in favour of the shareholder wealth-maximisation hypothesis, stating that poison pills protect shareholders by providing management a superior bargaining position. The shareholders react positively to poison pill adoption, particularly if a hostile takeover attempt is anticipated. Furthermore, shareholders seem to value the protective effect of the device, which both provides management a superior bargaining position and allows the maximal possible bid premium to be negotiated.

THE IMPACT OF STATE AFFILIATED DIRECTORS ON THE CAPITAL STRUCTURE SPEED OF ADJUSTMENT IN AN EMERGING MAKRET

This study analyses a unique aspect of the speed of adjustment to optimal debt levels in an emerging market by accounting for the impact of State Affiliated Directors (SAD) on internal governance mechanisms. The paper is motivated based view where firms adjust to reach an optimal level of debt ratio as well as the agency problem arising from the separation of ownership and control leading to conflicting interests between managers and shareholders in order to maximize firm value, which could ultimately impede shareholders wealth maximization. Furthermore, the potential for conflict between controlling and minority shareholders are also captured in the appointment of directors linked to the state. The authors, therefore, evaluate the presence of state affiliated directors and their potential to compromise board independence, which may lead to sub-optimal financing decisions. Analyzing firms below target levels, the study finds that the presence of SAD allows firms below target levels to adjust at more rapid rates given the potential for favorable treatment while obtaining credit financing from financial institutions. Contrastingly, the findings, however, show that firms which exceed target leverage levels tend to adjust at more rapid rates in the absence of SAD on boards. The study results point towards the reluctance of these firms to raise financing in equity markets given the possible dilution of ownership of controlling shareholders as well as the reluctance to reduce debt levels. The findings are consistent regardless of measuring debt based on book or market values and across randomized measures of board composition implying that the presence of SAD alters the dynamics of the cost of capital and thus managerial financing decisions.