Strategic Revenue Management: Revenue Stability and Maximizing Shareholder Value.

Author:Stanley, Darrol
 
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INTRODUCTION

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) (Boudoukh, Richardson, & Whitelaw, 2008; Fama & French, 2017). Yet, a corporation's earnings are a computational result of two related variables, revenue and cost (i.e., revenue minus cost equals earnings). Wasilewski (2013) has argued that, for the existence of corporations, since a cost structure likely exists whether or not revenue exists, then the existence of revenue drives the existence of earnings. Thus, while cost structures are important to the derivation of the resultant earnings, the generation and growth of revenue are crucial (perhaps necessary) to the generation and growth of the earnings outcome. Expectations of future earnings are, thus, effectively 'derived' from the expectations of future revenues. However, an initial review of the literature, as noted above, found that prior studies are heavily dominated by earnings and earnings growth linked to shareholder value, and while there is a robust literature around the subject of revenue and revenue growth, the latter tends to encompass such topics as has revenue enhancement, customer service, product expansion, and the like (see Olson, van Bever, & Verry, 2008). However, there seems to be little discussion as to how to incorporate revenue and revenue growth directly into the maximized shareholder value model, the latter of which is the subject of this paper. In addition, as discussed below, this paper adds another normally ignored revenue variable, revenue momentum.

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) have 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 (see Boudoukh et al., 2008; Fama & French, 2017), however, relatively little attention to the short-term generation, growth, and stability of revenue, as related to maximizing shareholder value, the latter of which will be a subject of this paper.

Thus, this paper offers insight into the question: how should revenue be strategically managed in the short-term to maximize shareholder wealth?

This paper begins with a...

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