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Shareholder value creation of microsoft and GE

Author

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  • Fernandez, Pablo

    () (IESE Business School)

Abstract

In this paper, we define and analyze shareholder value creation. To help us understand this concept better, we use the example of two listed companies, General Electric and Microsoft, between 1992 and 2003. To obtain the created shareholder value, we first define the increase of equity market value, shareholder value added, shareholder return, and required return to equity. A company creates value for shareholders when the shareholder return exceeds the required return to equity (Ke). In other words, a company creates value when it outperforms expectations. Created shareholder value is quantified as follows: Created shareholder value = Equity market value x (Shareholder return - Ke) Created shareholder value can also be calculated as follows: Created shareholder value = Shareholder value added - (Equity market value x Ke). We also calculate the created shareholder value of 400 American companies during the eleven-year period 1992-2003.

Suggested Citation

  • Fernandez, Pablo, 2004. "Shareholder value creation of microsoft and GE," IESE Research Papers D/564, IESE Business School.
  • Handle: RePEc:ebg:iesewp:d-0564
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    Cited by:

    1. Pablo Fernandez, 2011. "How to Value a Seasonal Company’s Discounting Cash Flows," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 27-52.
    2. Borell, Mariela & Heger, Diana, 2013. "Sources of value creation through private equity-backed mergers and acquisitions: The case of buy-and-build strategies," ZEW Discussion Papers 13-094, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Fernandez, Pablo, 2006. "The equity premium in finance and valuation textbooks," IESE Research Papers D/657, IESE Business School.
    4. Mohsen Afsharian & Anna Kryvko & Peter Reichling, 2011. "Efficiency and Its Impact on the Performance of European Commercial Banks," FEMM Working Papers 110018, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.

    More about this item

    Keywords

    Value creation; Shareholder value added;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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