1.1 Background to the Study
Public companies typically have ownership divested from management (Mullins and Christy, 2013). The owners of the companies (called shareholders) vest their management of the firm in the hands of management team (called the Board of directors), with the expectation and understanding that the Directors will run the company in such a manner that value is created for the owners. A firm’s management creates value for shareholders if the Market Value(MV) of ordinary shares surpasses the par or Book Value (BV) of ordinary shares (that is, MV is greater than BV), but destroys value if MV is less than BV and maintains value if MV equals to BV (Pandey, 2002 and Akinsulire, 2010).
The fiduciary duty which devolves upon the management of the firm requires that management should have a thorough understanding of the dynamics of underlying factors which may create or destroy value for owners, as such, the subject of value creation is too critical and important not to be ignored by any management seeking to fulfill its fiduciary duties. The theory of shareholder value, traditionally suggests that every company’s primary goal is to maximize the wealth of its shareholders (Jensen, 2002; Pandey, 2005; Chikwendu, 2009; and Madan, 2013). Considering that stakeholders (including shareholders) are increasingly holding management to greater accountability by requiring the latter (management) to demonstrate how they are creating value (CIMA, 2014), the shareholders’ value creation discourse has become very vital.
In spite of the vast number of studies conducted in foreign countries related to shareholders’ value, the debate as to the factors determining value creation is unsettled; this is evidenced by the number of studies that have been carried out on the subject in different parts of the world. The identification of financial factors which have the highest impact on value creation in a business can facilitate establishment of criteria for appropriate strategies selection in that direction (Marangu & Ambrose, 2014).
Finance theory contends that the ultimate goal of a company is to maximize shareholder wealth (Jensen, 2002 and Madan, 2013) this is because shareholders provide funds to the company. This means that the shareholders’ wealth will be reflected in the value of the company, which is indicated by the relevant company’s share price on the stock market. Shareholder wealth maximization as the goal of the company will facilitate the measurement of the performance of a company. If the stock price of a company shows an increasing trend in the long run, it indicates that the shareholders’ value created is good.
Besides stock market price, shareholders usually see the company’s success by its financial performance. The common question asked by the shareholders is, how does management generate adequate profits on the company’s assets? How does the company finance its assets? In this respect, Van and Wachowicz (2008) contend that profitability ratio is a popular determinants of the shareholders’ value creation (company’s performance).
The ability of a firm to create value by paying out dividend to its shareholders depends on its ability to generate cash from its operating activities and access of additional funds through external financing (Vazakidis and Adamopoulos, 2009). The shareholder returns basically depends on prices, costs, investments, volume of products sold and riskiness of firms in an industry (Osinubi and Amaghionyeodiwe, 2003; Soyede, 2005). The variables representing these factors can be considered as determinants of shareholders’ value. Working capital and fixed capital investment are the two components of investment value drivers (Rajesh, 2015). Management’s investment choices and financial policy are also value drivers in the context of riskiness of cash flows for the company (Olokoyo, Oyewo and Babajide, 2014)