Abstract:This paper investigates the relationship between growth rate and shareholder value creation, using a sample of 243 non-financial Standard and Poor's 500 (S&P500) companies, which have 22 years of consecutive data available . Sustainable Growth Rate Model (SGR) is used to divide the sample into two groups as high growth firms and moderate growth firms. Using Panel data approach, it is shown that sales growth below sustainable growth rate (SGR) enhance shareholder value at a significantly higher rate compared to growth above sustainable growth rate. The findings suggest that shareholder value creation maximizes around sustainable growth rate and decreases sharply once SGR exceeded.
Non-financial information such as environmental, social, governance (ESG) issues is becoming as much important as financial data. This study investigated the empirical relationship between Thomson Reuters Environmental Social Governance (ESG) Combined Score and performance of S&P 500 firms with eleven years of data from between 2006 and 2016. The study confirmed unidirectional positive and significant relation between ESG Combined Score and ROA, suggesting that improvements in ESG score have positive impact on operating performance of the firm. Although simultaneous equation estimations by means of instrumental variables (IV) employing two-stage least squares (2SLS) and three-stage least squares (3SLS) confirmed the significant positive relation between ESG Combined Score and operational profitability (ROA); contrarily, Tobin's Q seemed to affect ESG score rather than the ESG score inducing Tobin's Q. Higher Tobin's Q seems to lead to a lower ESG score. In other words, firms with higher growth potential as denoted by a higher Tobin's Q, are found to be less sensitive to ESG issues.
In a perfect capital market, investments should not be related to cash flows of the firm. Investments should only be determined by the amount of renewal investments required and growth opportunities available to the firm. Contrarily, due to the conflicts of interest between the managers and the shareholders, the theory on agency costs and free cash flow hypothesis propose that managers are inclined to over-use free cash flow, which is in excess of value-adding investments. It is claimed that firms invest their extra free cash flow on projects with returns below cost of capital of the firm. Some prior studies made on the topic implied the validity of this hypothesis. In other words, firm's resources might be wasted by means of over-investing. This study, based on a panel data of 154 Borsa Istanbul firms observed between 2005-2015, confirmed that firms over-invest when there is free cash flow available in excess of growth opportunities and dividends. Prior studies have used mostly regression models or Tobin's q to estimate investment prospects of the firm. However, this study adopted a direct method to estimate investment opportunities available to the firm. Keywords:Free cash flow hypothesis, Agency theory, Agency costs, Over-investment, Excess investment.JEL Classification: G31, G32, G34. Şirketler ihtiyaç Fazlası
In this study, to determine value creation rates at high and moderate growth levels, 8 years data of 167 non-financial companies of Borsa Istanbul is employed in a panel data analysis. The study found that growing significantly above sustainable growth rate is systematically associated with value destruction. It is also demonstrated that shareholder return is a concave function of firm growth, proposing an optimal point of sales growth beyond which further growth destroys shareholder value.
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