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What Drives the Shareholder Value?

  • I. M. Pandey

    ()

    (Indian Institute of Management, Ahmedabad, India)

In the strategy literature a lot of emphasis is placed on growth as a dominant business strategy. Is growth always desirable? The finance literature, on the other hand, focuses more on economic profitability and value. This study empirically explores the significance of profitability and growth as drivers of shareholder value, measured by the market-to-book value (M/B) ratio. Profitability is defined as economic profitability; that is, the spread between return on equity and the risk-adjusted cost of equity. Using panel data and employing the Generalized Method of Moments (GMM) estimator, our findings show a strong positive relationship between economic profitability and M/B ratio. Growth, on the other hand, is negatively related to M/B ratio. However, the economic profitability-growth interaction variable has a positive coefficient indicating that growth associated with economic profitability influences shareholder value positively. This finding is further supported when we analyse the relationships separately for the positive-spread firms and negative-spread firms. Our results also indicate negative relationship between M/B ratio and firm size and positive relation with business risk, financial risk and capital intensity.

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Article provided by Penerbit Universiti Sains Malaysia in its journal Asian Academy of Management Journal of Accounting and Finance.

Volume (Year): 1 (2005)
Issue (Month): 1 ()
Pages: 105-120

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Handle: RePEc:usm:journl:aamjaf00101_105-120
Contact details of provider: Web page: http://web.usm.my/aamj/

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  1. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Tim Opler & Lee Pinkowitz & Rene Stulz & Rohan Williamson, 1997. "The Determinants and Implications of Corporate Cash Holdings," NBER Working Papers 6234, National Bureau of Economic Research, Inc.
  3. Carolyn Y. Woo, 1984. "An Empirical Test of Value-Based Planning Models and Implications," Management Science, INFORMS, vol. 30(9), pages 1031-1050, September.
  4. Allan Timmermann & Gabriel Perez-Quiros, 1999. "Firm Size and Cyclical Variations in Stock Returns," FMG Discussion Papers dp335, Financial Markets Group.
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