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What Drives the Shareholder Value?

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  • I. M. Pandey

    (Indian Institute of Management, Ahmedabad, India)

Abstract

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.

Suggested Citation

  • I. M. Pandey, 2005. "What Drives the Shareholder Value?," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 1(1), pages 105-120.
    • Handle: RePEc:usm:journl:aamjaf00101_105-120
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    References listed on IDEAS

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    Cited by:

    1. repec:fst:rfsisf:v:8:y:2023:i:special-june_2023:p:72-82 is not listed on IDEAS
    2. Claudiu Botoc, 2015. "Risk And Firm Value In European Companies: A Dynamic Panel Data Approach," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 792-800, July.
    3. Farouq Rafiq Altahtamouni & Zaher Abdelfattah Alslehat, 2014. "The Impact of Accounting Indicators and Growth on the Market Value," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 9-18, April.
    4. Sweety Narang & Mandeep Kaur, 2014. "Impact of Firm-specific Attributes on Shareholder Value Creation of Indian Companies: An Empirical Analysis," Global Business Review, International Management Institute, vol. 15(4), pages 847-866, December.
    5. Ioan-Alexandru Dumitrescu & Alin-Ionuț Dorobanțu, 2023. "Analysis of the impact of financial balance indicators on the stock market performance of companies listed on the Bucharest Stock Exchange," Journal of Financial Studies, Institute of Financial Studies, vol. 14(8), pages 72-82, June.
    6. Shrikant Krupasindhu Panigrahi & Yuserrie Zainuddin & Azzlina Azizan, 2014. "Comparing Traditional and Economic Performance Measures for Creating Shareholder’s Value: a Perspective from Malaysia," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(4), pages 280-289, October.
    7. repec:hur:ijaraf:v:4:y:2014:i:2:p:13-22 is not listed on IDEAS
    8. Farouq Altahtamouni, 2018. "Determinants of Market Value (Case of Jordanian Banks)," International Business Research, Canadian Center of Science and Education, vol. 11(1), pages 124-132, January.

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