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Growth, Corporate Profitability, and Shareholder Value Creation

Directory : Faculty : Intellectual Contributions

Intellectual Contribution by Alan Jung

Contribution Title

Growth, Corporate Profitability, and Shareholder Value Creation

Publication

Financial Analysts Journal

Co-author

C. Ramezani and L. Soenen

Year

2002

Description

Associating corporate performance and shareholder value creation with

growth in earnings (or sales) has been the modus operandi in the

investment industry. It has greatly influenced managerial compensation

schemes and portfolio decisions. We shed light on the relationship between growth and performance by addressing two broad questions. First, what is the relationship between corporate profitability metrics, such as economic value added, and the company's earnings or sales growth rate? Second, does maximizing corporate profitability necessarily enhance shareholder value (as measured by Jensen's alpha)? Using multivariate analysis, we show that, although the corporate profitability measures generally rise with earnings and sales growth, an optimal point exists beyond which further growth destroys shareholder value and adversely affects profitability.

Complete Citation

Growth, Corporate Profitability, and Shareholder Value Creation, co-authored with C. Ramezani and L. Soenen. Financial Analysts Journal, Nov./Dec. 2002, Vol. 58, No. 6.

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