Total Shareholder Return Research Articles

Measuring People Management and Shareholder Value Creation Relationship. An Empirical Approach from Italian Firms

Italian companies are characterized by the presence of many small- and medium-size firms, along with some large organizations facing new challenges to improve financial results. In recent years being an Italian market player has not been so easy - even those with large and considerable production capacity - because market conditions do not always allow firms to sustain long-term competitive advantages. This is even more true considering the economic and financial crisis that began in the late summer of 2008; however, this goes beyond the purpose of this study on Aida's dataset update. Moreover, this paper considers shareholder value theory as well as the thesis supporting the relationship between employee development and responsibility, productivity improvement, employee commitment and financial performances. These considerations confirm that leadership development practices need to be integrated in workplaces to take real advantage of greater productivity creation and, as a consequence, greater shareholder value creation (Rappaport, 2006). The paper develops two different methodologies: a qualitative one (case histories) and a quantitative one (multiple regression). The first part of the paper, sections 1-3 (M. Pellicelli), presents the shareholder value theory and the value based management principles in the European context. In particular, we will analyse the significant results obtained by companies listed on the Italian stock market in terms of total shareholder return. The second part of the paper, sections 4-6 (C. Casalegno), presents leadership and leadership development theory an analyses the principal factors adopted by listed Italian companies that have obtained the best shareholder value results. In the third part, sections 7-8 (E. Cerruti), we illustrate the methodology and the dataset characteristics used, the characteristics of the variables set chosen, and the research results for the listed Italian companies. Finally, we analyse in detail the level and the intensity of the relationship between human capital and the dynamic of shareholder value creation.

Information Asymmetries and the Value-Relevance of Cash Flow and Accounting Figures – Empirical Analysis and Implications for Managerial Accounting

While some of the modern performance measures used in managerial accounting rely on cash flow based figures others try to take advantage of the information content of accounting figures. However, whether the additional information content in the accrual components of earnings improves the internal performance measurement is an open empirical question. To shed light on this question, I examine the correlation between operating cash flows and earnings with firm’s total shareholder returns. Using fixed firm effects regression methods for a large sample of German listed firms covering some 5,000 firm years, the analysis shows that generally operating cash flow and earnings are both positively correlated with total shareholder return. However, with increasing information asymmetry earnings become less correlated with the firm’s stock market performance and operating cash flows dominate earnings in explaining total shareholder return (and vice versa). These results suggest that, the information content of accounting figures is only relevant in settings characterized by low information asymmetries and, thus, there is no one-size-fits-all performance measure for managerial accounting purposes.

Financial Rewards for Social Responsibility

This study empirically examines the effects of publicly traded U.S. restaurant companies' social responsibility activities on the following two financial performance measures: accounting performance (return on equity) and value performance (total shareholder return). Results show that responsibility activities have a U-shaped effect on accounting performance, whereas they have no impact on a firm's value performance. Those results imply that restaurant companies in the United States may increase their investment in socially responsible activities to improve their accounting performance over the long term. While the study did not investigate communication mechanisms, it may be that restaurant companies should promote their social responsibility activities to consumers (and the financial market) as a means of enhancing the effects of those activities on their value performance.

Successful leadership — how would you know?

Boardrooms and business school classrooms are equally preoccupied with leadership, and success is often assumed to be about profit or Total Shareholder Return. It's neither. For leaders wanting to measure their own success, for those who appoint leaders to know what they are aiming at and for outsiders assessing the quality of leadership, Andrew Likierman shows how to do it.

New insights into executive compensation and firm performance

PurposeThis paper aims to examine the relation between executive compensation, firm size and firm performance on a panel of the so‐called “new economy” firms in the USA over the period 1996‐2002.Design/methodology/approachThe authors use two measures of performance, total shareholder return and return on assets, and concentrate on total CEO compensation, which includes stock option compensation, as equity‐based compensation practices have been prevalent in new economy firms. The estimation process uses both the feasible generalized least squares method of Parks and Kmenta and the panel corrected standard error method of Beck and Katz. These methodologies investigate error structures that do not conform to the classical ordinary least squares assumptions.FindingsThe econometric results indicate that estimates on firm size are robust to alternative specifications of the error structures. There is evidence however that the effect of firm size on CEO compensation is more significant after the stock market crash of 2000. The opposite holds true for the estimates on firm performance. In addition, estimates on firm performance are more sensitive to the estimation method and the specification of the error structures.Research limitations/implicationsThe research presented in this paper is a first step in the direction of understanding the pay to performance relation in the “new economy” industries in the USA. Additional research is warranted, which should extend both the time series and the cross section aspects of the data.Originality/valueThe paper fills an important gap in the existing literature by providing rigorous econometric evidence on the pay to performance relation in the so‐called “new economy” industries. The evidence provided in this paper is relevant as it complements the findings in the literature on executive compensation in the so‐called “old economy” industries, which typically make up the samples of most previous studies.

The Human Capital Impact on the Shareholder Value Creation

The Human Capital Impact on the Shareholder Value Creation

Executive Bonus and Firm Performance in the UK

As part of good corporate governance in general, executive bonuses are supposed to motivate senior managers to raise shareholder value; successive governance reforms since the 1995 Greenbury Report have tried to support remuneration committees to that end in the design of executive pay packages. However, well-intentioned regulations calling for the attachment of ‘challenging and stretching’ performance conditions to executive pay can work both ways. Yes, they can strengthen pay/performance relations, but attempts to make performance conditions stretching or ‘hard’ can also involve more bureaucracy and ‘camouflage’ opportunities for executives effectively to guarantee themselves higher incomes through ‘soft’ conditions. This paper addresses these possibilities, and reports on an analysis of executive bonuses in the UK from 2001 to 2003 that focuses on the question of whether the aggregate value and transparency of bonus schemes are associated with higher total shareholder returns. Bonus scheme complexity turns out to be the only dimension of bonus transparency that is associated with bonus pay-outs, tending to increase the value of pay-outs but without any associated increase in shareholder returns.

For top insurance companies, customer focus and merger mastery produce superior results

PurposeThe purpose of this article is to identify what truly propels property and casualty insurance industry leaders to reach their peak performance.Design/methodology/approachSelection: from an initial list of 706 insurers worldwide, the authors screened for publicly held companies that derived at least 60 percent of their annual revenues from sales of property and casualty products and for which at least five years of detailed financial data were available. The final sample included only companies from advanced economies of North America, Europe and Australia, for a total of 86 insurers. Variables: the regression analysis investigated possible correlations between total shareholder returns and 17 measures of business mix and financial performance, including total revenue growth, total net premium growth and profitability growth. Time period: The authors ran tests on data covering the decade from 1994 through the end of 2004.FindingsConsistent, sustainable revenue growth is the surest path to superior shareholder returns.Practical implicationsWhat sets the top performers in the insurance industry apart is an ability to master two of today's thorniest growth challenges: (1) high‐performance insurers cultivate organic growth by identifying their most valuable customers and investing to increase sales to them; by recruiting new clients through referrals and by lifting retention rates; (2) insurers that rely on mergers and acquisitions to boost revenues make regular, modest‐sized deals to add real value, and they integrate their new acquisitions quickly and seamlessly.Originality/valueProperty and casualty insurers that achieve top‐quartile revenue growth and produce exceptional returns for shareholders weave organic growth and acquisitions into a virtuous cycle of revenue expansion, pursuing deals that reinforce their ability to deliver customer value.

The UK Code of Corporate Governance: Link Between Compliance and Firm Performance

Listed companies in the UK are required to comply or give reasons for non-compliance with the recommendations of the UK code of corporate governance called The Combined Code. Prior studies investigating the relationship between compliance and firm performance have found the link to be either non-existent or at best weak. This study, taking a more holistic view of compliance develops an index of non-compliance for a panel of FTSE350 companies for four years (2000-2003). Using total shareholder return (TSR) as the measure of firm performance, we find that the Index is negatively related to TSR, implying that more compliant firms have higher returns. Contrary to the widely held assumption that governance variables are endogenous, our direct test for the endogeneity of the Index finds no evidence of endogeneity. This implies that causation runs from the Index to performance. One reason for the clear contrast of our findings with previous work could be our choice of performance measurement. Assuming that compliance with the Code is a means of signaling to investors that firms are well governed and by implication working in the interests of shareholders, the effects of such positive perceptions can be argued to fall more on market driven measures of firm performance than on measures that rely on accounting based values, such as the various proxies for Tobin's Q. Another reason could be the emphasis on constructing a finely tuned, comprehensive index, incorporating elements of compliance with both the letter as well as the spirit of the Code. Overall, our results suggest that for today's informed and discerning investors, compliance matters not just as a box ticking exercise but as a real change in the governance of large listed companies, for which they are willing to pay a premium.

Dividend Reinvestment, Price Appreciation and Capital Accumulation

Studies of historical stock market performance invariably focus on total shareholder return (TSR). Contrary to its name, TSR does not represent the return earned by equity investors but is instead the capital accumulation rate investors achieve if they purchase shares at the start date, reinvest all dividends to buy additional shares, and hold all shares to the terminal date. Investors who use historical TSR rates as a point of departure for establishing their assumed capital accumulation rates can be misled in two ways. First, because only the rare investor can afford to reinvest all dividends and sell no shares over a lifetime, the capital accumulation rate will almost always be lower than the TSR rate. Second, the remarkable historical growth in accumulated capital from reinvested dividends can mistakenly persuade some investors that dividends, rather than price appreciation, govern investment performance. Departures from 100% dividend reinvestment affect capital accumulation, and once investors make the dividend reinvestment decision, capital accumulation depends entirely on price appreciation. <b>TOPICS:</b>Long-term/retirement investing, equity portfolio management, wealth management

Does ‘Best Practice’ in Setting Executive Pay in the UK Encourage ‘Good’ Behaviour?

We examine how UK listed companies set executive pay, reviewing the implications of following best practice in corporate governance and examining how this can conflict with what shareholders and other stakeholders might perceive as good behaviour. We do this by considering current governance regulation in the light of interviews with protagonists in the debate, setting out the dilemmas faced by remuneration-setters, and showing how the processes they follow can lead to ethical conflicts. Current ‘best’ practice governing executive pay includes the use of market benchmarks to determine salary and bonus levels, significant levels of performance-related pay, the desire for executives to hold equity in their companies, the disclosure of total shareholder return compared to an index, and a perceived need for conformity, in order to grant legitimacy to policies. Whilst each of these may in some circumstances lead to good practice, each has the potential to cause dysfunctional behaviour in executives. Overall, we conclude that although best practice might drive good executive behaviour that coincides with the company’s and key stakeholders’ objectives, there are many reasons why it should not.

Contemporaneous relationship between EVA and shareholder value

This paper investigates the assertions that EVA is more highly associated with shareholder wealth and firm values than are traditional performance measures. Two commonly used value-based performance metrics – namely, Total Shareholder Return (TSR) and Tobin's Q – were also considered to highlight the value-relevance of EVA vis-a-vis these measures in predicting shareholder wealth. Using a panel sample of about 1000 American firms over the period 1990–2002, the study found compelling evidence consistent with the notion that EVA outperforms other traditional performance measures in explaining shareholder wealth. Value-relevance tests reveal EVA to be more highly associated with shareholder wealth than TSR and Tobin's Q. The incremental value-relevance tests have also suggested that EVA possesses the largest explanatory power over TSR and Tobin's Q. These results conclusively support the claims made by EVA proponents and further support the potential usefulness of EVA metric for internal and external performance measurement.

Procter &amp; Gamble's innovation success

PurposeReviews the latest management developments across the globe and pinpoints practical implications from cutting‐edge research and case studies.Design/methodology/approachScans the top 400 management publications in the world to identify the most topical issues and latest concepts. These are presented in an easy‐to‐digest briefing of no more than 1,500 words.FindingsIn 2004 consumer products giant Proctor and Gamble (P&amp;G) reported a 17 percent increase in volume, a 19 percent increase in sales, a 25 percent raise in earnings and a total shareholder return of 24 percent. Pretty impressive by anyone's standards. For P&amp;G's competition, the question, of course, is how did they do it? For Wall Street and the City on the other hand, the most pressing concern is whether or not this growth bubble will burst.Practical implicationsProvides strategic insights and practical thinking that have influenced some of the world's leading organizations.Originality/valueThe briefing saves busy executives and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy‐to‐digest format.

Shareholder Evaluation of Public Corporation Executives. An Executive Performance Measure being an Adequate Basis of a Motivational System

The main aim of the paper is determining the most adequate tool which should be applied in public corporations as a basis of motivational systems for executives. The issue is a part of a broader problem of minimizing the agency costs which is of interest in the field of corporate governance. We hold the view that a firm should serve its owners' interests and therefore we also explain in the paper why shareholders' wealth maximization is the best formulation of a company's main objective. In order to achieve the main aim of the paper, first we identify the desirable features of an adequate executive performance measure. These features are: 1) mutual agreement between maximization of the measure and realization of a company's main objective, 2) reflecting in the measure's final value only effects of executives' own decisions. Then we analyze measures currently used in business practice and proposed in the literature, e.g.: Return on Assets (ROA), Return on Equity (ROE), (Cash Flow) Return on Invested Capital (ROIC and CFROIC), Economic Value Added (EVA), Cash Value Added (CVA), Economic Profit (EP), Total Shareholder Return (TSR), from the perspective of possessing the identified features. We conclude that each of the measures has important drawbacks. Trying to overcome them we propose the measure called the Indexed Excess Shareholder Return (XESR) which we find the closest to the ideal. However, we also recognize factors which could diminish its quality in practical applications. We emphasize that a motivational system based on an adequate measure is only one - but the most important - corporate governance instrument reducing a threat of executives departing from shareholders' interests. It is worth noticing that a certain construction of a motivational scheme based on XESR is a realization of an indexed executives options idea. We think that particularly interested in a practical application of the XESR should be institutional investors (mainly pension funds). Our analysis - so to say, by the way - proved the great importance of capital markets and a level of their development (mainly efficiency) for reducing the agency costs and, in effect, for more efficient use of scarce resources and an economic growth rate. The other result of the paper is an indirect proof for a real capital markets efficiency based on experience from the Iowa Political Markets.

ALIGNMENT EXPOSED: HOW CEOS ARE PAID, AND WHAT THEIR SHAREHOLDERS GET FOR IT

This article begins by arguing that, for many companies, there is a significant “disconnect” between how managers are paid and what is actually achieved for shareholders. This paper answers two questions of prime importance to investors: Is there a way to know beforehand whether managers' incentives are well aligned with those of its shareholders? And does such alignment actually make a difference in the returns one is likely to see?In answering the first question, the author argues that cash bonuses and performance‐based equity grants (i.e., grants based on managers' meeting accounting‐based operating targets) are likely to provide stronger, more cost‐effective incentives than grants of stock or options because the former are generally based on measures over which managers have significantly more control than the stock price. Using this insight, the author develops a method for evaluating compensation structures based on the variability of compensation, the number and type of compensation metrics purportedly driving that variability (including the award of performance shares or options), the stability of those metrics over time, and the apparent level of discretion in the use of those metrics to either fund or distribute bonuses (including equity). All these elements are disclosed to varying degrees in the proxy statements or annual reports of companies.Using his compensation scores for 140 companies and their return history over the last eight years, the author concludes that “high alignment” companies outperform their “low alignment” peers by more than 5% per year in total shareholder returns. Furthermore, increases in alignment scores by individual companies over time tend to lead to higher total shareholder returns, and degradation of scores lead to lower returns. In short, observable improvements in compensation structure appear to pay off in the form of significant abnormal returns.

Capital market orientation in innovation management

There is a positive correlation between total shareholder return over a period of five to ten years and sustainable innovation performance of companies. Outperformers in innovation management are likely to achieve higher growth and price-earnings-ratios based on five thrusts of sustainable innovativeness: (1) a corporate strategy giving top priority to innovation and to building a competency platform; (2) a comprehensive innovation process; (3) a flexible organisation favouring innovation behaviour; (4) multiple innovation partnerships; (5) an innovation culture characterised by effective organisational learning and knowledge management. High productivity will typically also be a result of these. Companies can assess, monitor and communicate their innovation performance with the help of an innovation scorecard. Investors, analysts and bankers will be able to use the innovativeness indicators of the scorecard to gauge better the future growth and profitability potential of companies.

Estimating the Efficiency Effects of U.S. Telecommunications Mergers

The paper attempts to examine the effects of two horizontal mergers between Baby Bells, the SBC-Pacific Telesis merger and the Bell Atlantic-Nynex merger, on the performance of the respective operating companies. The effects of the mergers are investigated by comparing the performance of the merging companies with a control group of non-merging companies and also, the performance of the merging companies before and after merger. The comparisons are made on total factor productivity (TFP) change, shifts in the total cost function and shareholder returns. In addition, the estimation of total cost functions provides estimates for economies of scale and scope, which are often cited as one of the main drivers for mergers. The empirical analysis is carried out with annual data for 38 operating companies over the period 1991-2000. One of the main results is that while in terms of shareholder returns merged holding companies slightly outperformed non-merged companies for a short-period, this small gain soon disappeared. There was no significant increase in TFP for merged companies before and after merger and also, no systematic difference in TFP between merged and non-merged companies. The TFP regressions show that mergers have a negative or zero impact on TFP. Moreover, the cost analysis indicates that mergers might have even increased total costs. We control for demand fluctuations, the state of technology and two policy variables (regulation and competition) in both the productivity and the cost analysis. Finally, no economies of scale and scope are identified. Based on all these findings, the paper suggests that mergers between large Baby Bells did not produce net economies of scale and did not lead to substantial productivity growth.

Intellectual Capital, Monitoring and Risk: What Predicts the Adoption of Broad-based Employee Stock Options?

In this paper, we use empirical analysis to analyze company characteristics associated with the adoption and maintenance of broad-based stock option plans. First, a cross-sectional analysis evaluates what company characteristics are now associated with these plans. Second, a longitudinal analysis examines the company characteristics that predict the adoption of such plans. Overall, our results provide support to the claim that higher monitoring costs prompt firms to adopt and maintain employee stock option plans. Firms with higher levels of business risk are less likely to shift some of that risk to employees through stock-based compensation, whereas firm with higher variability in total shareholder returns are more likely to adopt broad-based employee stock options. Nonunion firms are more likely to adopt and maintain such plans, and financial constraints do not appear to be driving the adoption decision.

Brand Equity and Shareholder Value

It is often assumed that brands represent an asset, as well as a source of current and future earnings and cash flows for a firm. As such, the value of the brand, or brand equity, should manifest itself in the market value of the firm and thus have an impact on shareholder value. Yet, almost no research exists that has empirically investigated this relationship between brand value and shareholder value. In the present study, brand equity is measured for 43 Dutch corporate brands using the Brand Asset Valuator® for the years 1993 and 1997. Directional changes within the BAV Power Grid, measuring Brand Strength and Brand Stature, are statistically compared with directional changes in shareholder value between 1993 and 1997. Three different measures for determining shareholder value are used: Total Shareholder Return, Earnings per Share, and the Market-to-Book ratio. Various indications are found that confirm the expected relationships, but a clear need is observed to develop reliable and valid indicators for shareholder value. Some managerial implications, limitations of the study and directions for future research are discussed.

CATCHING UP WITH REENGINEERING

UNDER MOUNTING PRESSURE from customers, regulators, and shareholders to cut costs and stimulate innovation, the pharmaceutical industry is taking measures that other major industry sectors started on five to 10 years ago. Business process reengineering, enterprise resource planning (ERP), and supply chain management—old news to chemical, automobile, and electronics manufacturers— are new obsessions among drugmakers. Industry watchers agree that pharmaceutical companies have no choice now but to improve efficiency throughout their operations. At the Pharmaceutical Manufacturing 2003 conference in Boston earlier this month, Michael J. Hathaway, a partner with IBM Business Consulting Services, noted that while the sector is still more profitable than others, important economic indicators now spell big trouble for drugmakers on Wall Street. Total shareholder return for the top 10 pharmaceutical companies, for example, has fallen 83%, and while the Financial Times pharmaceuticals indexrose 350% from 1993 to 20...