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Value Based Management
When does a company create shareholder value?
Return on capital (ROIC) > Cost of capital (Marshall, 1890)
Value Based Management
What goal maximizes shareholder value?
Maximizing the share price for current and future shareholders
Value Based Management
Is there a correlation between TRS (total return per share) and R&D expenditures (investments)?
Yes,
Empirical evidence: companies with long term value goals create more value.
--> TRS = value
--> R&D investments = short/long - term value goals
Investments in R&D correlate positively with long-term total returns to shareholders (TRS)
Value Based Management
How can you create value for current & future shareholders?
Value Based Management
How is the fast-grow strategy by start-ups called?
Value Based Management
What benefits does a long-term perspective on value creation offer for companies? For the economy?
1. For companies:
2. For the economy:
Value Based Management
Why is maximizing current share price not equivalent to maximizing long-term value?
E.g., managers could get rid important marketing expenses and claim being more efficient.
--> investors cannot verify the claim.
--> asymmetry in information between managers and shareholders can lead to differences in the stock price in the short term versus long term
Value Based Management
When managers and boards of directors evaluate a firm performance, how might focusing exclusively on corporate earnings lead them in the wrong direction?
1. Earnings can be positive and growing but
return on capital (ROIC) < cost of capital
2. Neglects that value is created only if
return on capital > cost of capital
Value Based Management
Criticism of shareholder view
1. Neglects other stakeholders
--> True for short term focus
--> Wrong for long term: no value creation without happy customers, suppliers and employees
2. Inequality and unsustainable growth
--> If regulation is adequate => only long term shareholder value consistent with e.g., sustainable growth
--> True if regulation flawed
Value Based Management
Examples for social-responsibility initiatives creating long term shareholder value
Best Buy:
investment in female employees reduced women turnover
and helped female employees build leadership skills that benefit the firm
Value Based Management
How can a company best trade-off conflicting interests?
Focus on long-term value creation
=> Best for resource allocation and health of economy
Value Based Management
How can a company best trade-off conflicting interests?
Example 1: Employees as stakeholders
Solution:
1. Stakeholder approach:
Treating stakeholders equally well => does not answer how much to pay employees
2. Shareholder approach
Wages enough to attract quality employees and keep them happy and productive
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