Published on Feb 16, 2016
To measure shareholder value creation has been the issue of discussion all around the world. It has become crucial since the companies were increasingly committing to creating shareholder value.
Old traditional measures are criticised for having low correlation with shareholder value creation. Therefore, new valuation methods are needed to measure the shareholder value creation. However, the changing process from the traditional methods to the new ones is not easily welcomed. How then shareholder value creation is measured nowadays is of crucial importance. In order to address this issue, the thesis presents in a general way how shareholder value is created as a background to the valuation methods being used for shareholder value creation measurement. The empirical part of the study showed that although the companies in this study have implemented many ways to create shareholder value, little effort is being made to measure it since the majority of them are still using the traditional accounting measures. The reasons for this may be conservatism and lack of pressure from both the stock market and shareholders. Having noticed this we then recommended the companies to use “value based methods” when measuring shareholder value creation since they are more reliable.
One of the most frequently used terms in business today is Shareholder value. The "equity culture" wildfire is spreading rapidly from the US to the rest of the world (Thakor et al, 2000). It is seen as crucial all over the world. In Sweden the new measurement systems of shareholder value creation were introduced in the last decade and have been slowly introduced in various companies. Indeed, some of the leading companies like SCA and SKF have made the creation of shareholder value one of their key corporate objectives.
Moreover shareholders are the owners of the corporation and the board of directors are their representative and elected by them. The objective function of the corporation is to maximize the shareholder value. Managers in most of the developed world must focus on building shareholder value
Objective of the Research
The purpose is to conduct an analytical study of different methods used by companies to measure shareholder value creation. The study also aims to give a general picture of how shareholder value is created as a background to measuring shareholder value. Furthermore all that will be done will be based on an empirical study.
Creating and measuring shareholder value can be studied from different perspectives. When studied from the shareholder or other stakeholder perspective, the research is mostly based on the information collected from the shareholder or stakeholders. When it is the stock market perspective, the information used in the study is collected mainly from the stock market. If the study is based on the company perspective then the information used will mainly be collected from the company. Every perspective is very important to investigate. However due to the time limit and the scope of the problem we are obliged to make some limitations.
Many factors can affect shareholder value such as the environment surrounding the firm, weaker business climate, political situation, and currency fluctuations. We are not going to cover the above factors in our study since the background information will be covered in general and it is not the main focus of our research. However they are discussed partially only when our sample companies consider them to be crucial factors affecting their operations.
In the process of answering our research issue we used different approaches. We used an explorative approach. We went through the literature to document the shareholder value related issues in order to get basis information about the research issue. We also used a descriptive approach during the theoretical part where we give a general view on the existing ways of creating shareholder value and the existing methods of valuing shareholder value creation. Our thesis has also a prescriptive part where we explain what ought to be done in this area of creating and measuring shareholder value. We believe these approaches are best for our study since they allow us to better document ourselves, describe and prescribe furthermore, all these are vital in answering our research issue.
Positivistic and Hermeneutic Perspective
A scientific problem can be approached either under a positivistic or hermeneutic conceptual framework. In the positivist position there is a mindindependent that can be described with objective language. Statements are only meaningful if they are synthetic and represent contingents or empirical truths or analytic that represent formal truth. The meaning of a statement is delivered from the method of its verification (Ryan et al, 1992). Moreover, Ericksson and Weiedersheim (1999) state that in the positivistic approach the empirical research is the most important part; the scientific value has to be verified with empirical data.
Hermeneutics study is the interpretive understanding or meaning with special attention to context and original purpose. It takes the position that nothing can be interpreted free of some perspective so the first priority is to capture the perspective and elucidate the context of the people being studied and the researcher own perspective must be made explicit (Patton, 1990). The hermeneutic approach is that which has strong emphasis on the overall view and it assumes that all actions, social names and values have a human foundation Positivistic framework is the best for our study since we collected the empirical data from the companies and we draw conclusions on the basis of them. Thus the empirical data have a great importance in our study.
Moreover the empirical data are collected on the company perspective towards the measuring shareholder value and creation of shareholder value as a background, which then contribute in excluding our personal view and societal norms from our study. This has great importance for our study since it shows how the creation and the measuring of shareholder value is and not how it seems to be.
Two methods may be used in the research, those are quantitative methods and qualitative methods. In the quantitative study the focus of the research is quantity and its goals are predictions, control, description, confirmation, hypothesis testing. Its associate phrases are experimental, empirical, and statistical. The sample in the study may be large, random, and even representative. The data collection is done through inanimate instruments such as scales, tests, surveys, questionnaires, and computers. The mode of analysis is deductive by statistical methods and the findings may be precise, narrow or reductionist
Thesis Done By Beatrice Nyiramahoro & Natalia Shooshina, Göteborg University
ABB Group, www.abb.com
Bilia AB, www.bilia.com
Booz, Allen& Hamilton, www.bah.com
Boston Consulting Group, www.bcg.com