Maximising Shareholders' Wealth: Importance and Factors

Running Head: Finance
Finance
Abstract:
The report deals with the companies’ objective of maximising the shareholders’
wealth. Backed with the support of empirical and theoretical research, it studies
the relevance of the investment decisions taken by the company in generating
value for the shareholders. Also, it has been seen that there are many other
factors like market timing, public announcement of corporate strategic
investment decisions, organisational structure, ownership structure and capital
budgeting moderators which impacts the shareholders’ wealth.

Finance
Introduction
Now-a-days, companies are more focussed towards maximising the shareholders
wealth. Gone are those days when companies were only concerned about
generating profit and maximising the employees’ wages and salaries. It is
important for the companies to think about their shareholders because they are
the people who provide capital to the company without being a burden on the
company’s assets like other fund lenders.
Maximisation of Shareholders’ Wealth: Primary
Objective of the Company
Shareholders’ wealth is expressed as Number of total shares held multiplied by
the market value per share. This expression clearly reveals that to maximise the
shareholders’ wealth it is important to maximise the market value of shares. To
maximise the value of shares it is very important for the management to take
significant investment decisions. The management should not go ahead with the
projects possessing negative Net Present Values (NPVs). There are many
theoretical and empirical studies conducted on this topic.
A study was conducted on the firms situated in Slovenia to check their primary
objective. As we know there are two objectives of any firm either to maximise
the shareholder’s wealth or maximise the wages or salaries of the employees. To
carry out the study, fifty one important firms of Slovenia were selected. The
research were done focussing on the firm’s objectives, goals, capital structure,
dividend pay-out policies, capital budgeting decisions etc. A proper questionnaire
was prepared focussing on the previously mentioned area for the chief financial'
officers of the selected Slovenian countries. Then these questionnaires were
analysed along with the important financial statements of the companies. From
the study, it was found that the companies’ capital structure has more equity
over debts. The amount received from the equity shareholders are not
reinvested into any finance activities or investment activities rather it is only
used in the main operating activities. It was also found that the equity
shareholders are getting very low amount in the form of dividends. All these
show that the companies in Slovenia are focussing more towards maximising the
wages and salaries of the employees. Companies are not operating with the
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Finance
objective of maximising the shareholder’s wealth the reason for which they are
not into reinvesting the shareholders’ amount into profitable projects to generate
more revenues (Mramor and Valentincic, 2001).
From the above study we could know that there are firms who are still employee
driven. It becomes really important for the firms to focus on maximising the
shareholders’ wealth in order to attract more investment from them.
Effect of Investment Type and Market Timing on
Shareholders’ Wealth
Majority believes that investment decision plays an important role in maximising
the wealth of shareholders. By investment decision we mean the decision
regarding stock selection or assets selection for investing the shareholders’
amount. There are many assets in which the shareholders’ wealth is invested to
create value for them. Asset allocation is normally done by the companies to
bring a proper balance between the risk and reward. There are usually three
assets classes: fixed income, equities and cash and cash equivalents. However,
there are other factors too which affects the shareholders’ wealth and one such
important factor is market timing which has been proved from the study
conducted on the Nairobi Securities Exchange listed companies.
A study was conducted on the companies listed on Nairobi Securities Exchange.
The objective of the study was to see if the asset classes and market timing
affects the shareholders’ value or not. For this purpose, fifty-seven firms were
studied during 2009-2013. Therefore, it was found that, there exists a positive
relationship between the asset classes and shareholders’ wealth. Also, the
market timing and shareholders’ wealth shares a positive relation.
From here, we could interpret that shareholders’ wealth are largely impacted by
the type of investment made by the companies. However, at the same time we
saw that the wealth of the shareholders are also influenced by the market timing
investment and not solely depends upon the investment decision of the firm
(Barasa, 2014).
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Finance
Measuring Shareholders’ Value: Conventional Method or
Modern Method?
The financial managers are faced with the pressure of creating the value for
shareholders on the daily basis. Quantifying the shareholders’ value help the
management of the company in integrating management decision with the
organisation’s preferences and needs. There are many methods to quantify the
shareholder value like return on capital employed, return on net worth, earning
per share etc. All these are the conventional methods of measuring the value of
shareholders. In the last few years, it has been noticed that the organisations
have started employing Economic Value Added (EVA) framework for measuring
the shareholders’ value. As per Stern Stewart, EVA framework for measuring the
shareholders’ value is more helpful over the conventional methods. To study this
point, a real time study was conducted in the year 2010-11. For the study 500
Indian companies were selected and it was found that only 17 companies were
using EVA to quantify shareholders’ value. Rest of the companies were still using
the traditional measures to disclose the shareholders’ value in their annual
reports (Bhasin and Shaikh, 2013).
Impact of Capital Budgeting Decision on Shareholders’
Wealth
Capital Budgeting decision forms a very important part of the companies’
investment decisions. Also, capital budgeting decisions forms a significant part of
financial management. There are many techniques which are involved in the
decisions relating to the capital budgeting. Few of such techniques include
Payback period, Net Present Value and Internal Rate of Return (Rossi, 2015).
There was a study which was conducted on the firms situated in Nigeria. The
objective of the study was to see whether there exist any kind of relationship
between the capital budgeting decisions and the goal of organisation to
maximise the shareholders’ wealth or not. The study found three things: (1)
investment identification really impacts the shareholders’ wealth ;( 2) Approval
of budget and its authorization also makes a difference to the shareholders’
wealth and (3) Project monitoring and controlling also influences the
shareholders wealth (Uwah and Asuquo, 2016).
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