Value creation measures : an industry-based study

Abstract

PURPOSE : The purpose of this paper is to identify the shareholder value creation measure best suited to express shareholder value creation for a particular industry. DESIGN/METHODOLOGY/APPROACH : The analysis was performed on 192 companies listed on the Johannesburg Stock Exchange, classified into nine different samples or industries. Five shareholder value creation measures were examined, namely market value added (MVA), a market-adjusted stock return, the market-to-book ratio, Tobin’s Q ratio, and the return on capital employed divided by the cost of equity. FINDINGS : An analysis of the nine categories of firms led to the identification of different measures that are suited to express value creation. Stock returns did not provide an appropriate value measure. Instead, depending on the specific industry, Tobin’s Q ratio, MVA, and the market-to-book ratio should be used to measure and express value creation. PRACTICAL IMPLICATIONS : For management, the value drivers identified for each industry present a clear indication of industry-specific variables upon which they can focus in operating activities to most efficiently increase shareholder value. ORIGINALITY/VALUE : Unlike previous studies that use only one or two different shareholder value creation measures as dependent variables, this study uses five different value creation measures. Another contribution of this study is the compilation of a unique set of value drivers that explain shareholder value creation separately for each of the nine different categories of firms.