What Drives the Shareholer Value?

Indra Pandey

No WP2005-09-04, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

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, spread between return on equity and the risk-adjusted cost of equity. Using panel data and employing the 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.

Date: 2005-09-04
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Journal Article: What Drives the Shareholder Value? (2005)
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