Measures of a Firm's Financial Performance and Long-term Shareholder Value.

Author:Stanley, Darrol J.


It has been stated that, "in the competition for investor capital, organizations strive to provide increasingly positive rates of return to the investor." For publically traded corporations, the returns are generally measured in terms of shareholder value, i.e., the total return on investment, also commonly referred to as the 'holding period return', which is computed from the change in the share price plus dividends. The stock price has generally been viewed as a reflection of the investor's expectations of the corporation's future earnings and earnings growth, a subject where extant studies have devoted considerable investigations (e.g., into the relationships of historical and projected earnings on the changes in stock price and maximizing shareholder value) (e.g., Boudoukh, Richardson, & Whitelaw, 2008; Fama & French, 2017; Stanley & Wasilewski, 2017, p.141). To promote the likelihood of successfully competing for investor capital, corporations generally present, periodically, various measures of the corporation's current, past, and expected future financial performance, such as return on investment, return on assets, revenue growth, net profit margin, and so forth. The financial performance measures and their numerical values influence the current and future strategic decisions made by firms (Hulbert, 2018; Terlep, 2018). As such, given the seemingly myriad of financial performance measures a firm could focus its strategic attention on and present to potential investors, and in the general presence of limited strategic resources, which of a firm's financial performance measures are more likely to result in greater shareholder value?

An initial literature review found that firms generally focused on financial measures that employed earnings and earnings growth, with prior studies being heavily dominated in relating these measures to shareholder value. Yet, evidence suggests that other financial performance measures (e.g., revenue growth) may be as important to a firm's strategic decisions and, hence, potential financial performance and returns to the investor (see Hulbert, 2018; Olson, van Bever, & Verry, 2008; Terlep, 2018). Furthermore, it appears that past studies generally investigated financial measures in discrete contexts (e.g., return on assets as related to holding period return). However, as the firm's external environment (e.g., regulatory, competitive, macroeconomic) changes, the crucial measure of, and needed relative emphasis on, a financial performance measure may change and, thus, it is deemed critical, in efforts to increase holding period returns, to periodically reassess the financial performance measures the firm employs (Terlep, 2018). For example, it may be argued that such reassessments of financial performance measures are likely to become increasingly important by the emergence of disruptive entities, as exemplified by firms such as Uber, Airbnb, Netflix, etc., that may apply novel concepts, components and measures of financial performance.

An important consideration to the holding period return is the time horizon of the return, short-term versus long-term (where short-term and long-term are usually considered, respectively, quarterly [or annual] and at least 5-year periods). It is generally assumed that investors seek high levels of return over the long term. Consistently, Antia, Pantzalis, and Park (2010) found that corporations where CEOs had shorter time decision horizons were associated with lower firm valuations (i.e., stock market value), which suggests that corporate strategic decisions should focus on long-term results. However, investors also look to maximize shareholder value in the short-term and, thus, corporate strategic decision makers are also pressured to provide for short-term (e.g., quarterly) results. The foregoing indicates that corporate strategic decision makers need to attain a balance between short-term and long-term financial performance (Welch & Welch, 2007). An initial review of the literature found extensive attention to the long-term (e.g., see Boudoukh et al., 2008; Fama & French, 2017; Hulbert, 2018; Stanley & Wasilewski. 2017, p. 141). Thus, consistent with the foregoing, the long-term horizon of firm financial performance and of holding period returns will be the focus of this paper.

Thus, this paper offers insight into the research question: from the strategic management viewpoint, which financial performance measures should the firm management focus on to...

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