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Considering the shareholder perspective: value-based management systems and stock market performance

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Abstract

We empirically study the use of value-based management systems in listed German firms and examine implications for firms’ stock market performance. Using a novel, hand-collected data set covering 1,083 firm years from 2002 to 2008, we find that value-based management systems become increasingly common. Specifically, in 2008 42% of our sample firms have implemented such a system. In the empirical analysis, we find that firms implementing value-based management systems earn both statistically significant and economically substantial abnormal stock market returns measured within a 2-year adoption phase. These excess returns are not jeopardized by poor post-adoption returns. In the analysis, we carefully control for risk and account for endogeneity concerns. Overall, our findings support the view that shareholders consider the adoption of a value-based management system as a credible signal that management will focus on shareholder interests and that such systems actually increase shareholder value.

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Notes

  1. We define value-based management systems as all types of integrated management strategy and financial control systems that rely on a metric which considers return (on invested capital) and the cost—or at least the amount—of invested capital simultaneously. We call the latter a value-based management metric.

  2. Note, that our arguments are similar to the ones found in Dittmann et al. (2009), who study the effect of bankers on boards. Moreover, note that due to screening annual reports, our sample is not affected by a potential response bias as most other studies on VBM are, since they use survey data (see also the discussion in Lueg and Schäffer 2010).

  3. Ameels et al. (2003) provide a comprehensive survey of commonly used VBM metrics.

  4. There are several studies investigating the explanatory power of VBM metrics on shareholder value. The results of these studies are, however, also inconclusive. For instance, while Stern et al. (1995) and O’Byrne (1996) find that VBM metrics outperform traditional accounting measures when explaining stock returns, other studies do not find much evidence, neither in the Anglo-Saxon area [e.g. Biddle et al. (1997) or Dodd and Chen (1996)], nor in the European area (Kyriazis and Anastassis 2007).

  5. The German stock indices have been restructured early in 2003. We use the early 2003 constituents lists also for the year 2002. This index restructuring represents a natural starting point, since there exists no similar classification structure prior to 2002.

  6. In EU countries, firms can generally choose between two different points of access to equity capital markets. Beside the EU-regulated market most exchanges also offer a market regulated by themselves. The two markets differ with respect to legal basis and status but also with respect to transparency requirements. Within the EU-regulated market the Frankfurt Stock Exchange (FWB—Frankfurter Wertpapierbörse), which is the most relevant German stock exchange, allows firms to list in one of two different market segments. While firms only willing to fulfill the EU-regulated minimum transparency level are listed in the General Standard, firms opting for a listing in the Prime Standard have to fulfill additional transparency requirements.

  7. See also Campbellet al. (1997), Lyon et al. (1999) and Kothari and Warner (2006) for a critical discussion of methods to test long-run excess returns.

  8. In Model (2) we use the common notation with a one-period lagged endogenous variable on the right hand side (e.g. Dey 2008). Note, however, that our performance period is 2 years, i.e. we measure masr and rasr over 2 years. Now, since we use yearly observations in the regression specifications below, the right hand side variable lESR in these specifications is actually lagged for two periods.

  9. IV methods allow to circumvent the endogeneity problem. The challenge, however, is to find an appropriate instrument [see Wooldridge (2002) for a detailed discussion].

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Acknowledgments

We are grateful for valuable comments of several anonymous referees, Frederike Wall (one of the editors of the special issue), Ralf Ewert (acting as Editor-in-Chief), Bernhard Gegenfurtner, Piero La Mura, Hagen Lindstädt, Thomas Schmid, seminar participants at Leipzig Graduate School of Management (HHL), participants of the 2010 annual meeting of the European Accounting Association (EAA) in Istanbul and in particular participants of the 2010 annual meeting of the European Management Association (EURAM) in Rome. Thanks to Jana Oehmichen and Philipp Schaller for outstanding research assistance. The usual caveat applies.

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Authors and Affiliations

  1. Center for Entrepreneurial and Financial Studies (CEFS), TUM School of Management, Technische Universität München, Munich, Germany

    Marc Steffen Rapp

  2. Department of Financial Management and Capital Markets, TUM School of Management, Technische Universität München, Munich, Germany

    Daniel Schellong & Maximilian Schmidt

  3. Department for Corporate Governance, Gutenberg School of Management and Economics (GSME), Johannes Gutenberg-Universität Mainz, Mainz, Germany

    Michael Wolff

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  1. Marc Steffen Rapp
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Correspondence to Marc Steffen Rapp.

Appendix

Appendix

See Table 6.

Table 6 Definition of variables
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Rapp, M.S., Schellong, D., Schmidt, M. et al. Considering the shareholder perspective: value-based management systems and stock market performance. Rev Manag Sci 5, 171–194 (2011). https://doi.org/10.1007/s11846-010-0056-z

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