What Drives the Shareholder Value?
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.
Volume (Year): 1 (2005)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://web.usm.my/aamj/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999.
"The determinants and implications of corporate cash holdings,"
Journal of Financial Economics,
Elsevier, vol. 52(1), pages 3-46, April.
- 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.
- Allan Timmermann & Gabriel Perez-Quiros, 1999.
"Firm Size and Cyclical Variations in Stock Returns,"
FMG Discussion Papers
dp335, Financial Markets Group.
- Gabriel Perez-Quiros & Allan Timmermann, 2000. "Firm Size and Cyclical Variations in Stock Returns," Journal of Finance, American Finance Association, vol. 55(3), pages 1229-1262, 06.
- Hausman, Jerry A, 1978.
"Specification Tests in Econometrics,"
Econometric Society, vol. 46(6), pages 1251-71, November.
- Carolyn Y. Woo, 1984. "An Empirical Test of Value-Based Planning Models and Implications," Management Science, INFORMS, vol. 30(9), pages 1031-1050, September.
When requesting a correction, please mention this item's handle: RePEc:usm:journl:aamjaf00101_105-120. 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: (Journal Division)
If references are entirely missing, you can add them using this form.