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An Empirical Test of a Resources Deployment Portfolio (RDP) Approach to Business Group ROE Decomposition

Author

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  • David M. Chen

    (Graduate Institute of Finance, Fu Jen Catholic University, No. 510, Zhongzheng Rd., Xinzhuang City, Taipei County 242, Taiwan)

  • Li-Ling Yang

    (Department of Finance, China University of Science and Technology, College of Management, Fu Jen Catholic University, Taiwan)

Abstract

This study proposes a resources deployment portfolio (RDP) approach to decomposing return on equity (ROE) for business analysis. The five components are return on operating equity (RoOE), return on financial equity (RoFE), return on other equity (RoXE), return on influencing equity (RoIE), and R&D intensiveness (R&DI). Empirical results demonstrate that RDP decomposition offers substantial improvement over DuPont decomposition in explaining market valuation. Confirming the perceived sustainability, RoOE is the most consistently significant component for both long-term and short-term value creation. In line with prior research findings, R&DI is generally significant in contributing to long-term value creation but is not significant for short-term value creation.

Suggested Citation

  • David M. Chen & Li-Ling Yang, 2009. "An Empirical Test of a Resources Deployment Portfolio (RDP) Approach to Business Group ROE Decomposition," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 695-720.
    • Handle: RePEc:wsi:rpbfmp:v:12:y:2009:i:04:n:s0219091509001812
    DOI: 10.1142/S0219091509001812
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    Keywords

    Valuation; DuPont decomposition; resources deployment portfolio; research and development;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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