Shareholder value | EPFL Graph Search

Shareholder value is a business term, sometimes phrased as shareholder value maximization. It became prominent during the 1980s and 1990s along with the management principle value-based management or "managing for value". The term "shareholder value", sometimes abbreviated to "SV", can be used to refer to: The market capitalization of a company; The concept that the primary goal for a company is to increase the wealth of its shareholders (owners) by paying dividends and/or causing the stock price to increase (i.e. the Friedman doctrine introduced in 1970); The more specific concept that planned actions by management and the returns to shareholders should outperform certain bench-marks such as the cost of capital concept. In essence, the idea that shareholders' money should be used to earn a higher return than they could earn themselves by investing in other assets having the same amount of risk. The term in this sense was introduced by Alfred Rappaport in 1986. For a publicly traded company, Shareholder Value is the part of its capitalization that is equity as opposed to long-term debt. In the case of only one type of stock, this would roughly be the number of outstanding shares times current shareprice. Things like dividends augment shareholder value while issuing of shares (stock options) lower it. This shareholder value added should be compared to average/required increase in value, making reference to the organizations cost of capital. For a privately held company, the value of the firm after debt must be estimated using one of several valuation methods, such as discounted cash flow. The first modern articulation that shareholder wealth creation is the paramount interest of the management of a company was published in Fortune magazine in 1962 in an article by the management of a US textile company, Indian Head Mills, in which its authors stated: The objective of our company is to increase the intrinsic value of our common stock.

Essays in Bank Financing

Yalda Sigrist

This thesis examines the optimal mode of financing for banks and financial institutions. The first chapter, which is a joint work with Prof. Jean-Charles Rochet, investigates how Systemically Important Financial Institutions (SIFIs) should be financed. The main specificity of such firms is that their failure imposes negative externalities on the financial system and, more broadly, on the whole economy. Since their shareholders do not internalize these externalities, they tend to provide less capital than what would be socially optimal, generating too many failures. In jurisdictions where they receive tax exemptions, CoCo bonds are a simple means of increasing the resilience of SIFIs while providing large tax benefits to banks' shareholders. However, we show that when tax revenues are properly accounted for, these CoCo bonds are detrimental to social welfare. The second chapter provides a formal model of a bail-in plan, a pre-defined contract that results in self-recapitalization of a financial institution when it is in distress and has no access to equity financing. Bail-ins have the potential to eliminate inefficient bank liquidations and ease financing constraints in bad times. Using a theoretical model of a bail-in contract where banks face time varying financing frictions, taxation and liquidation costs, I show that banks' capital structure decisions and optimal financing and pay-out policies are largely affected by the design of the contingent capital (specifically the conversion ratio). However independent of its design, for an optimal level of debt, bail-in contracts always decrease shareholders incentives to build up liquid buffers and to recapitalize in good times but also eliminate any risk-taking incentives. The third chapter presents a model of bank optimal maturity structure when banks face systemic risk through correlated investments. Banks can privately affect the probability of success of their projects. Risky short-term debt can act as a disciplinary device if it is not rolled over when an adverse interim-date signal on the quality of banks' assets is received. The optimal maturity structure is the result of the trade-off between the disciplinary benefits of short-term debt and the costs of inefficient early liquidations. I show that bank asset commonality affects this trade-off since it reduces the costs of exerting effort through positive information synergies and increases the inefficiency of early liquidations through negative fire-sale externalities. In particular, there is a more important role for the disciplinary effects of short-term debt in high correlation, high fire-sale externalities and low information synergies environments.

EPFL2017

Essays in Bank Financing

Yalda Sigrist

EPFL2017