Value drivers of return on equity: a study of Indian companies

Latha S. Chari and R.P. Mohanty

International Journal of Accounting, Auditing and Performance Evaluation, 2007, vol. 4, issue 6, 633-649

Abstract: Shareholder value depends on the intrinsic value of a company which, in turn, is driven by sales growth rate, operating profit margin, incremental capital investment, income tax and cost of capital (Rappaport, 1998). Often, there is confusion among professionals as to which of the value drivers are significantly contributing to value and on which they should focus to enhance value on a sustainable basis. In this paper, we make an attempt to list the value drivers of return on equity (ROE) and classify them as internal and external value drivers. Using the financial data of 112 companies listed on the Bombay stock exchange in India, for a period of seven years from 2000 to 2006, the impact of the value drivers on the ROE is quantified. By statistical analysis, some important value drivers which are sustainable in the long term and contribute significantly to value creation have been derived.

Keywords: economic value added; financial performance measurement; performance management; profitability analysis; return on equity; ROE component analysis; shareholder value maximisation; shareholder wealth creation; value creation; value drivers; value enhancement; India. (search for similar items in EconPapers)
Date: 2007
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