What Determines TSR

11 Pages Posted: 8 Apr 2014

See all articles by Bennett Stewart

Bennett Stewart

EVA Dimensions LLC; Stern Stewart & Co.

Date Written: Winter 2014


Researchers have long wrestled with the question of what determines a company's total shareholder return, or TSR, and their results have been decidedly mixed. Some empirical studies come down in favor of dividends or earnings per share, while others favor return on capital or other profitability measures. In this article, the author takes a “first principles” approach that begins by demonstrating that TSR should be a function of a company's economic profit, or its Economic Value Added (or EVA). He shows that, from a theoretical standpoint, the sum of dividends and share price appreciation - which is the definition of TSR - is ultimately a function of increasing EVA and, along with it, a company's “aggregate NPV.” He further shows that if stock prices are determined by discounting expected cash flows, corporate NPV will equal the discounted value of EVA, and increasing NPV will come down to increasing EVA. In developing his argument, the author demonstrates that TSR is actually a leveraged version of a measure he calls “TIR,” or total investor return, which is the blended return that an investor would earn from owning the entire capital structure of a company, bonds as well as stock. He then presents the findings of regression analysis showing that a company's TIR and TSR are both strongly positively correlated with its EVA performance plus the change in its aggregate NPV (with R2s equal to 1.0 and 0.94, respectively). In a final step, the author shows that the change in EVA provides a better statistical explanation than other financial measures for changes in aggregate NPV and, hence, actual TSR.

Suggested Citation

Stewart, Bennett, What Determines TSR (Winter 2014). Journal of Applied Corporate Finance, Vol. 26, Issue 1, pp. 47-55, 2014. Available at SSRN: https://ssrn.com/abstract=2422150 or http://dx.doi.org/10.1111/jacf.12053

Bennett Stewart (Contact Author)

EVA Dimensions LLC ( email )

15 Watersedge Court
Locust Valley, NY 11560
United States
516-759-3711 (Phone)

HOME PAGE: http://www.evadimensions.com

Stern Stewart & Co. ( email )

New York, NY 10022
United States

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