IDEAS home Printed from
   My bibliography  Save this article

Determinants of Value Creation in Emerging Market Firms ¨C¨C An Empirical Examination


  • Rajesh Kumar

    () (Institute of Management Technology, Dubai)

  • Sujit Sukumaran

    () (Institute of Management Technology, Dubai)


This study examines the determinants of value creation in Indian firms using Partial Least Square Structural Equation Modeling (PLS-SEM) methodology based on approximately 43,000 firms representing 15 different sectors. Enterprise value multiples are used as proxies for market value effects. The study finds that the important determinants of value creation are leverage, profitability, cash flow, agency costs, dividend payout, size, discretionary expenditures and intangibility. The disciplinary role of debt in controlling agency costs is documented by the study. Highly leveraged firms tend to create lower value for firms. Firms with high intangible assets tend to have higher agency costs and higher valuation effects. Firms with high growth rate in earnings and cash flow will have higher valuation and profitability. Greater the size of the firm, higher is the value creation potential. Some evidence suggests that higher the discretionary expenditure intensity of firms, lower the value creation and profitability for firms. The study finds negative relationship between tax shields and cash flow. Agency costs are negatively related to cash flow and value creation. Liquid firms tend to have higher cash flows and higher valuation effects. Increased dividend payout signal to the market about the increased valuation effects for firms.

Suggested Citation

  • Rajesh Kumar & Sujit Sukumaran, 2019. "Determinants of Value Creation in Emerging Market Firms ¨C¨C An Empirical Examination," Review of Economics & Finance, Better Advances Press, Canada, vol. 17, pages 79-92, August.
  • Handle: RePEc:bap:journl:190306

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    2. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. "Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-1764, December.
    3. Hakansson, Nils H, 1982. "To Pay or Not to Pay Dividend," Journal of Finance, American Finance Association, vol. 37(2), pages 415-428, May.
    4. Jennergren, L. Peter, 2004. "Continuing Value in Firm Valuation by the Discounted Cash Flow Model," SSE/EFI Working Paper Series in Business Administration 2004:15, Stockholm School of Economics.
    5. Rajesh Kumar Bhaskaran & Sujit K Sukumaran, 2016. "An empirical study on the valuation of oil companies," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 40(1), pages 91-108, March.
    6. Nils H. Hakansson., 1982. "To Pay or Not to Pay Dividends," Research Program in Finance Working Papers 124, University of California at Berkeley.
    7. Bhandari, Laxmi Chand, 1988. " Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence," Journal of Finance, American Finance Association, vol. 43(2), pages 507-528, June.
    8. Jaehoon Hahn & Hangyong Lee, 2009. "Financial Constraints, Debt Capacity, and the Cross‐section of Stock Returns," Journal of Finance, American Finance Association, vol. 64(2), pages 891-921, April.
    9. Chi, Jianxin Daniel & Su, Xunhua, 2017. "The Dynamics of Performance Volatility and Firm Valuation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(1), pages 111-142, February.
    10. Yang, Chau-Chen & Lee, Cheng-few & Gu, Yan-Xiang & Lee, Yen-Wen, 2010. "Co-determination of capital structure and stock returns--A LISREL approach: An empirical test of Taiwan stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(2), pages 222-233, May.
    11. Nikhil Varaiya & Roger A. Kerin & David Weeks, 1987. "The relationship between growth, profitability, and firm value," Strategic Management Journal, Wiley Blackwell, vol. 8(5), pages 487-497, September.
    12. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    13. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
    14. Ricardo Goulart Serra & Roy Martelanc, 2014. "Hierarchical Determinants of Brazilian Stock Returns During the 2008 Financial Crisis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(S5), pages 51-67, September.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Valuation effects; Enterprise value multiples; Leverage; Agency costs; Intangibles; Discretionary expenditures; Firm size;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bap:journl:190306. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carlson) The email address of this maintainer does not seem to be valid anymore. Please ask Carlson to update the entry or send us the correct email address. General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.