A Study of Factors Driving Shareholders' Value

Topics: Stock market, Stock, Regression analysis Pages: 34 (8777 words) Published: February 27, 2010

A Study of Factors Driving Shareholders’ Value and Influencing Sensex Fluctuation In India

Executive Summary

The objective of this project is to analyze the most important factors which drive shareholders, value. Shareholders’ value here refers to the MVA (market value added) which means the additional value which shareholders are earning on their invested money. The performance of a company matters a lot in creating a positive image of that company in front of its stakeholders. Moreover, the main objective of a company is to maximize the shareholders’ value. So, shareholders always want to know that the Company with whom they have entrusted their hard earned money is efficiently utilizing it and thus, creating Value for them. We have always read the annual report of the Companies to find out information about their “top line” and “bottom line”. We also have various financial ratios and terms which act as essential factors to consider for our aid like Return on Capital Employed (ROCE), Return on Net worth (RONW), Earning per Share (EPS), Dividend per Share (DPS), Debt Equity Ratio (D/E Ratio) and Economic Value Added (EVA).

This research is an attempt to find out whether EVA, DPS, D/E Ratio, EPS, ROCE, RONW of the companies listed in sensex really explains the value accretion for the shareholders and cause fluctuation in sensex. So, I have taken these variables as Independent variables and MVA as a dependent Variable (shareholders’ value) to apply regression analysis to come out with a result that which variable is having a high degree of Correlation with MVA and significantly explains variation in MVA.

To perform this analysis secondary data has been collected from Prowess and www.bseindia.com

Out of 30 companies listed in sensex, 23 companies are selected as sample. 7 companies are eliminated because of inadequate information available for these companies. The reason behind choosing these companies is that their reliability in terms of selection of the Companies as only those Companies are selected which have a listing history of at least 3 month with sufficient trading frequency.

After that the data of different financial indicators of these Companies (RONW, ROCE, D/E Ratio, EPS, DPS, Avg. Market Capitalization and Beta value) are collected for the period of 2003-2008. CAPM model is used for calculating cost of equity. The EVA and MVA is calculated. After that change in MVA has been calculated with respect of previous year. Here 2003 has been taken as a base year and study has been done year wise from 2004-2008. Both EVA and Change in MVA are standardized by dividing both of them by Net Worth of the respective companies. This is done in order to get relative value of EVA and MVA over the same Net Worth. SPSS software is used for applying simple and multiple regression analysis. First Simple regression has been applied taking one Independent variable at a time in order to find most important variable and eliminate least important variable and analyze each variables influence over Change in MVA individually. After this multiple regressions has been applied in order to find the combination of Independent variables which are strongly correlated with change in MVA. In my study EVA has been found the most important variable then RONW, and then ROCE. These variables are having a high degree of correlation with change in MVA and significantly explaining the variation in MVA individually. While the combination of EVA, EPS, and DPS are having a very high degree of correlation with change in MVA. So, my analysis shows that it is best to invest in a company generating higher and positive EVA, RONW, and ROCE it will add additional value to shareholders.


Chapter-1 Introduction Page No.

1.1 Company Profile…………………………………………………………………… 12-13

1.2 Product & Services Offered by IL&FS...

Bibliography: o CMIE’S Prowess
o http://www.bseindia.com/about/abindices/bse30.asp
o http://www.bseindia.com/about/abindices/betavalues.asp
o http://www.bseindia.com/histdata/hindices.asp
o http://neeravnagar.blogspot.com/2007/08/drivers-of-shareholders-value.html
o Ali M Ghanbari (Jul’07) “The Relationship between Economic Value Added and Market Value Added: An Empirical Analysis in Indian Automobile Industry” The ICFAI Journals of Accounting Research.
o Chapter 32 of “Investment Valuation” by Aswath Damodaran
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