Valuation for Managers
Closing the Gap between Theory and Practice
Dennis N. Aust
Managing Director, CharterMast Partners
Over the past three decades, creating shareholder value has been widely adopted as a principal objective for publicly held corporations, at least in theory.1 In practice, the results have been mixed. The long-term secular increase in corporate sector profits is consistent with the image of hard-nosed corporate executives diligently working to increase shareholder value. Yet a continuing stream of corporate miscues suggests otherwise. Whether because of overpriced acquisitions and bad strategic decisions, or because of flagrant, Tyco-type abuses, a significant number of major firms still fail to create value for their shareholders. Numerous benchmarks document this consistent underperformance over both long-term and short-term horizons. For example, during 2007, even though the S&P 500 index increased by 3.5 percent, nearly half of the firms in the index (249 firms, according to statistics provided by Ativo Research LLC) ended the year with their stock prices lower than when they started.
Of course, there are numerous reasons for falling stock prices. External factors such as adverse business cycles, market dynamics, and sector rotation regularly drive down stock prices in any given year. Even when executives diligently work to create value for shareholders, they can still be undermined by competitors that push back, staff who fail to execute, ...

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