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Shareholder Value Creation: A Definition

10 Pages Posted: 30 May 2001 Last revised: 12 Oct 2017

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: October 6, 2017

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 a listed company, General Electric, between 1991 and 2012.

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. In other words, a company creates value in one year when it outperforms expectations.

The created shareholder value is quantified as follows:
Created shareholder value = Equity market value x (Shareholder return - Ke)

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 142 American companies.

Keywords: Shareholder value creation; Created shareholder value; Increase of equity market value; Shareholder value added; Shareholder return; Required return to equity

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, Shareholder Value Creation: A Definition (October 6, 2017). Available at SSRN: https://ssrn.com/abstract=268129 or http://dx.doi.org/10.2139/ssrn.268129

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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