Shareholder Value
Shareholder value ( German: shareholder value ) is defined as market value of equity and equal simplifies the enterprise value and the dependent value of the shares. The shareholder-value approach has been developed by Alfred Rappaport business concept, which considers the company's activities as a series of payments ( cash flows ), analogous to the results from a ( non-cash) investment series of payments. The valuation of the company is determined by the free cash flow. Shareholder value is obtained from the discounted to the valuation date free cash flow less the fair value of debt ( ie, for example bank debt ).
From the market value of the stock multiplied by the number of securities held is the asset (value ) by a shareholder (shareholders ) owns a corporation. An applied on Shareholder Value corporate policy will therefore try to increase the market value of the shares, the market value of the entire company. Comprehensive is not among them understood only a short-term increase in the share price, but a long- term optimization of competitiveness and profitability. Today, the shareholder value principle is used by companies worldwide.
- 6.1 Methodological Critique
- 6.2 Substantive criticism
Origin
The shareholder value approach goes back to the published in 1986 the book " Creating Shareholder Value " by Alfred Rappaport. Thereafter, the management has to act in the interests of its shareholders. Your goal is to maximize long-term shareholder value through profit maximization and increasing the return on equity. The required minimum return on equity dominated other concerns. Because the term has now come under severe criticism, he was replaced in both the literature and in the company through " Value Based View" ( engl. value-based view).
Related to the corporate governance
Shareholder value can be considered as a result of corporate management. Various factors influence how Rappaport executed in 1999. The remarkable thing is that management decisions only indirectly have an impact on the effective created shareholder value.
In particular, the layer of the assessment component may enhance the effects of management decisions taken or pick up again. Here then is the critique of the calculation of shareholder value ( see below).
The Robust steps are actions, which are believed to effectively make a difference in terms of the SHV. This is also visible that the shareholder value is an approach that is consistent with stakeholder value.
Calculation of shareholder value
In its main variants of shareholder value after the
- Discounted cash flow method as the sum of the discounted cash flows minus the debt value, or the
- Income approach calculated as the sum of discounted future profits and distributions.
Calculation of shareholder value after the first above the main line:
- The free cash flow (FCF ) of the considered years ( t) are discounted by (1 WACC) and then summed.
- This sum is the discounted according to the same procedure, total residual value of the sums (estimated free cash flows for the period after the years under review ) and the value of non- operating assets ( portfolio investment, speculation goods, etc. ).
- If we subtract this sum from the debt of the company, one obtains shareholder value.
Applications
With the discount factors can determine the cost of capital. From capital market data, borrowing costs are determined. The Capital Asset Pricing Model is suitable for determining the cost of equity. The risk premium in the U.S. is at 5%, in Europe at 4 %. Typical values for beta will be around 1 equity beta also takes into account the leverage effect.
Merits of the shareholder value approach
The main power of the concept is emphasized in the literature that it returns all business activities for their impact on free cash flow and discounting free cash flows taken into account the time of payment. Already in the definition of shareholder value can be seen that
Since these quantities are the subject of long-term financial planning, it is clear how interlinked the operational management on the one hand and financial management on the other hand.
Internal corporate value and market value
Often the idea of a value orientation and that of a capital market orientation is equated. However, shareholder-value concepts in terms of orientation of the corporate policy on ( fundamental ) value of the company based on a significantly less restrictive assumptions, as a shareholder-value concept in terms of capital market orientation. The orientation of the stock market value as a target in fact presupposes that the market value and the fundamental value of the company matches. In fact, however, many empirical studies on the efficiency of the capital market, that there exist a variety of valuation anomalies and thus the fundamental proper value ( as a reasonable target size of a value-based management ) may differ from current market value. Reasons for this lie in areas such psychologically -related errors by investors who studied the behavioral finance research. In addition, information asymmetries are observed: For the calculation of the appropriate fundamental corporate value, the best available ( corporate ) data are used, while the capital market is not fully informed.
Critique of the shareholder-value approach
Methodological critique
Methodological criticisms relate to themselves
- Shortcomings in the provision of corporate values and especially the cost of capital rates in an imperfect capital market ( cost of capital),
- The consideration of incentive problems of management, the zielkongruent only by very specific targets, ie acting in the interests of the owners.
Substantive criticism
Critics reject the focus from the enterprise value. Equity shareholders of a company are not the only stakeholder of a company. Case of business decisions and potential impacts, such as on employees, customers, the public and the environment should be taken into account. So the business ethicist Peter Ulrich argues that shareholder value approach is " corporate unethical " and unsuitable as a basis of a corporate philosophy. It is true, " the legitimate claims of all stakeholders in a fair, balanced way to take into account ", ie next to the shareholders ', employees, suppliers, customers and the entire social environment ". This criticism has led to alternative concepts, such as the holistic management system Balanced Scorecard.