A Study on the Integrated Approach of Shareholder Value Analysis
(Sprache: Englisch)
The theory of shareholder value is an issue that has to comprise a dichotomy in terms of the standpoint from which it is looked at. Shareholders and the management of a company in many cases still represent counterparts whereas interests do not continuously...
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The theory of shareholder value is an issue that has to comprise a dichotomy in terms of the standpoint from which it is looked at. Shareholders and the management of a company in many cases still represent counterparts whereas interests do not continuously align. In this study shareholder value theory is approached by investigating the shareholder perspective in correspondence to shareholder wealth gains in the UK market environment through the implementation of six major financial performance measurement methods including: the Price/Earnings ratio, the Discounted Cash Flow Model, the Dividend Valuation Model, the Economic Value Added, the Market Capitalization, the Capital asset Pricing Model and the shareholder value approach as suggest by Alfred Rappaport. Having applied them to six selected stock listed companies enabled the author to develop a shareholder value ranking according to their financial performance and the deriving shareholder value dedication.
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Chapter, 3.2 Corporate Objectives:The overriding corporate objective of stock listed companies is to align the interest of the management in respect to the economic business operation with the objective of maximizing shareholder value accompanied by the shareholder wealth maximization principle (Watson and Head, 1998). Shareholders are able to obtain wealth through dividend payouts and capital gains. Due to the fact that the concept of shareholder wealth maximization is highly complex, literature suggests other corporate objectives as possible substitutes:
1. Maximization of profits
2. Maximization of sales
3. Survival
4. Social responsibility
Nevertheless Watson and Head (1998) stress that these short term objectives should have a supporting function subordinated to the prevailing long - term objective of shareholder wealth maximization. The reason for the co-existence of such is inherent in the degree of differentiation considering the number of interest groups (internal as well as external) with stakes in the company including employees, the local community and creditors. Correspondingly, demands of the various stakeholder groups diverge on the subject of what the company should achieve.
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Social responsibility:
This particular objective has gained an increasing importance during recent years. Good working conditions represent an underpinning requirement for an excellent corporate culture as being a part of the contribution to a company s goodwill. Possible examples to be named are an employees council, a cafeteria or discounts in local shops and sport facilities offered to employees. Additionally anti-social actions such as environmental pollution are to be avoided in order not to upset the local community and maintain a good reputation among potential customers. Again, the objective of running the business in a way that social responsibility is guaranteed is crucial but should represent a rather supportive function to the overriding goal of
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shareholder wealth maximization.
Profit maximization vs. shareholder wealth maximization:
Reasons why profit maximization is not the same as shareholder wealth maximization (Arnold, 2007):
Prospects: Future prospects including the company s growth potential are disregarded. In addition, the corporate strategy as being the main driver of whether capital gains can be realized or not, is not taken into account when it comes to pursuing the objective of profit maximization.
Risk: The process of profit maximization may cause a volatility of equity due to certain risks that have to be put up with, whereas shareholders are likely to consider a firm with constant income flows to be a better investment than one with high risk.
In other words, profit maximization does not take risk as a variable into account, which inevitably causes a trade-off phenomenon between the cash flows and risk. Specifically, the prospect of greater anticipated returns is associated with larger risk. Evolving from that coherence, higher cash flows lead to an increase of the share price whereas a higher risk has a negative impact on it (Gitman (1998). Communication Even though shareholders are aware of the risk associated with an investment in shares, they seek to minimize it through gathering as much information as possible about the company to mitigate their level of uncertainty. So, a good communication between the firm and its shareholders through the implementation of a sustainable investor relation strategy is of great benefit to both parties. Since especially institutional shareholders that have a comparatively high amount of money invested in the company want to be up to date about the current strategies, future investment plans and the sources of income, large firms have a team of senior executives who spend a lot of time on getting this information delivered (Gitman, 2007). Ignoring the significance of communicating with investors along with the impact of the perceived corporate among the
Profit maximization vs. shareholder wealth maximization:
Reasons why profit maximization is not the same as shareholder wealth maximization (Arnold, 2007):
Prospects: Future prospects including the company s growth potential are disregarded. In addition, the corporate strategy as being the main driver of whether capital gains can be realized or not, is not taken into account when it comes to pursuing the objective of profit maximization.
Risk: The process of profit maximization may cause a volatility of equity due to certain risks that have to be put up with, whereas shareholders are likely to consider a firm with constant income flows to be a better investment than one with high risk.
In other words, profit maximization does not take risk as a variable into account, which inevitably causes a trade-off phenomenon between the cash flows and risk. Specifically, the prospect of greater anticipated returns is associated with larger risk. Evolving from that coherence, higher cash flows lead to an increase of the share price whereas a higher risk has a negative impact on it (Gitman (1998). Communication Even though shareholders are aware of the risk associated with an investment in shares, they seek to minimize it through gathering as much information as possible about the company to mitigate their level of uncertainty. So, a good communication between the firm and its shareholders through the implementation of a sustainable investor relation strategy is of great benefit to both parties. Since especially institutional shareholders that have a comparatively high amount of money invested in the company want to be up to date about the current strategies, future investment plans and the sources of income, large firms have a team of senior executives who spend a lot of time on getting this information delivered (Gitman, 2007). Ignoring the significance of communicating with investors along with the impact of the perceived corporate among the
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Bibliographische Angaben
- Autor: Tony Müller
- 2014, Erstauflage, 144 Seiten, 26 Abbildungen, Maße: 15,5 x 22 cm, Kartoniert (TB), Englisch
- Verlag: Anchor Academic Publishing
- ISBN-10: 3954892634
- ISBN-13: 9783954892631
Sprache:
Englisch
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