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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.

Size
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.

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