Thursday, 15 June 2017

Recognising Real Value Creation

Data from both Europe and the United States found that companies that created the most shareholder value showed stronger employment growth.

In the past 30 years, there have been at least 6 financial crises that arose largely because companies and banks were financing illiquid assets with short-term debt.

Two activities that managers often use in an attempt to increase share price but that do not actually create value are 
  • changes in capital structure (or financing of the firm) and 
  • changes in accounting practices.

Maximising current share price is not equivalent to maximising long-term value because managers, who know more than shareholders about the firm's prospects, could slash crucial expenses to improve the stock price in the short term.  Eventually, this will catch up to the firm, and the long term stock price will suffer.

During the Internet boom of the late 1990s, many firms lost sight of value creation principles by blindly getting bigger without maintaining a competitive advantage.

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