top-rated free essay

Determinants of corporate performance

By Dennis-Nyasente Mar 08, 2015 386 Words
Determinants of corporate performance
Analysis of the determinants of corporate financial performance is essential for all the stakeholders, but especially for investors. The Anglo-Saxon corporate governance focus on maximizing shareholder value. This principle provides a conceptual and operational framework for evaluating business performance. The value of shareholders, defined as market value of a company is dependent on several factors: the current profitability of the company, its risks, its economic growth essential for future company earnings1. All of these are major factors influencing the market value of a company. Other studies (Brief & Lawson, 19922; and Peasnell, 19963) argue the opposite, that financial indicators based on accounting information are sufficient in order to determine the value for shareholders.

Market Position
A company’s financial performance is directly influenced by its market position. Profitability can be decomposed into its main components: net turnover and net profit margin. Ross et al. (1996) argues that both can influence the profitability of a company one time. If a high turnover means better use of assets owned by the company and therefore better efficiency, a higher profit margin means that the entity has substantial market power.

Risk and Growth
Risk and growth are two other important factors influencing state corporations profitability. Since market value is conditioned by the company’s results, the level of risk exposure can cause changes in its market value5. Economic growth is another component that helps to achieve a better position on the financial markets, because market value also takes into consideration expected future profits.

The size of State Corporations can have a positive effect on profitability because larger firms can use this advantage to get some financial benefits in business relations hence greater profits. Large companies have easier access to the most important factors of production, including human resources. Also, large organizations often get cheaper funding.

In the classical theory, capital structure is irrelevant for measuring company performance, considering that in a perfectly competitive world performance is influenced only by real factors. Recent studies contradict this theory, arguing that capital structure play an important role in determining corporate performance8. Barton & Gordon (2008) suggest that entities with higher profit rates will remain low leveraged because of their ability to finance their own sources. On the other hand, a high degree of leverage increases the risk of bankruptcy of companies.

Cite This Document

Related Documents

  • Evaluation of Corporate Performance

    ...Evaluation of Corporate Performance In 1994, Jeff Bezos was a 30-year-old hedge fund analyst with a degree in computer science and electrical engineering from Princeton University. It was at this time Bezos decided to put his business plan in play. Jeff pulled up a file that had the business model he intended to use, which had been write in ...

    Read More
  • The Determinants of Corporate Dividend Policy

    ...The Determinants of Corporate Dividend Policy A dividend decision of a firm is an outcome of various considerations. These considerations differ across time and industry. The present study re-examines various factors that have a bearing on the dividend decision of a firm by using a two-step multivariate procedure. First factor analysis is p...

    Read More
  • Determinants of Corporate Cash Holdings

    ...Determinants of Corporate Cash Holdings C. Hobma, S. Labitzke, M. Munsterhuis, L. Zwols March 24, 2011 This paper examines what determinants explain corporate cash holdings of 1078 US rms listed on the New York Stock Exchange (NYSE) for the period January 1990 till December 2007. Using regression analysis with panel data we show that our n...

    Read More
  • Effect of Leverage on Corporate Performance in Nigeria

    ...EFFECT OF LEVERAGE ON CORPORATE PERFORMANCE IN NIGERIA A PAPER PRESENTED TO THE DEPARTMENT OF MANAGEMENT SCIENCE OF LADOKE AKINTOLA UNIVERSITY OF TECHNOLOGY OGBOMOSO, OYO STATE. ABSTRACT In contemporary business organization, profit maximization is seen as the primary objective of establishing a firm; therefore the success of a firm is me...

    Read More
  • Corporate Governance and Financial Performance

    ...CORPORATE GOVRERNANCE AND FINANCIAL PERFORMANCE CASE STUDY: ROOFINGS GROUP 1.0 INTRODUCTION Corporate governance is concerned with ways in which all parties interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and other insiders take measures or adopt mechanisms that safeguard the interests of the s...

    Read More
  • Sustainability Strategy and Corporate Performance

    ... From: Joanna Zeng, Senior Vice President for Sustainability at Nestlé To: CEO and the board of directors, Nestlé Subject: Implementing a sustainability strategy to improve corporate performance Date: April 18, 2013 Recommended Action: The task was to develop a sustainability strategy that Nestlé ought to implement to improve our corpora...

    Read More
  • Leadership, the Determinant of Corporate Culture and Diversity

    ...Leadership, the Determinant of Organizational Culture and Diversity Introduction With the world becoming smaller and smaller from the increasingly intensive business trade, the globalization not only bring huge opportunity, but also bring more challenges to organizations than ever before. Multicultural teams, therefore, are used in workplac...

    Read More
  • Corporate Environmental Responsibility: the Performance of Cadbury requiring large amount of raw materials that are collect from natural resources (Cadbury's Shareholders Find Palm Oil Leaves a Bitter Taste 2004).This essay examine the performance of Cadbury and how they dealing the problems with raw materials as well as the effect on the environment and stakeholders. Cadbury used to be a small beve...

    Read More

Discover the Best Free Essays on StudyMode

Conquer writer's block once and for all.

High Quality Essays

Our library contains thousands of carefully selected free research papers and essays.

Popular Topics

No matter the topic you're researching, chances are we have it covered.