Determinants of Share Value Creation among Listed Companies in the Frankfurt Stock Exchange, Germany: Literature and Theoretical Examination

Abstract

The main purpose of any firm is to enhance its shareholders' wealth. Investors, management and other stakeholders need to be aware of the company's performance to enable them make informed decisions about the future. The creation of shareholder value is becoming increasingly challenging as owners and managers are forced to make appropriate financial decisions that contribute to the management of operations that create value and also identify activities that destroy value. In addition it is necessary to implement effective instruments which are able to evaluate real value created. Value creation occurs in a company when its business is able to generate returns above the demands of investors or returns of capital invested are more than the cost of a company's capital. Most financing decisions are dictated by necessity which requires in-depth analysis of financing options, costs attracted and long-term implications. A firms' shareholder value creation is based on firms' earnings ability and firms return on its net worth. A firm financing policy may be to choose from alternative sources, which may be internal or external. Internal financing includes use of retained earnings while external financing constitutes borrowing by issuing debt instruments and issue of new shares. The skills to identify financial variables which have the greatest impact on value creation in an organization can facilitate establishment of criteria for appropriate strategies. The study found that the main measures to quantify shareholder value creation in Germany financial sector and among listed companies are earnings per share (EPS), return on equity (ROE), return on assets (ROA) and dividend per share (DPS). the determinants of value creation were found to include growth rate, operating profit margin, income tax rate, working capital investment, fixed capital investment, cost of capital and value growth duration. The study recommends that the regulatory authorities in German financial sector particular should design a policy that will motivate building materials firms to be paying dividend to their shareholders on regular basis. This will increase the shareholders' value due to the nature of relation between the variables which is positive.