Shareholder Value Creation of Microsoft and GE

Abstract:     
In this paper, we will define and analyze shareholder value creation. To help us understand this concept better, we will use the example of two listed companies, General Electric and Microsoft, between 1992 and 2003.

To obtain the created shareholder value, we must first define the increase of equity market value, the shareholder value added, the shareholder return, and the required return to equity.

A company creates value for the shareholders when the shareholder return exceeds the required return to equity (Ke). In other words, a company creates value when it outperforms expectations.

The created shareholder value can also be calculated as follows:

Created shareholder value = Shareholder value added - (Equity market value x Ke)

We also calculate the created shareholder value of 400 American companies during the eleven-year period 1992-2003.

Keywords: Shareholder value added, shareholder value creation, created shareholder value

JEL Classifications: G12, G31, M21

Working Paper Series