How can management deliver value for shareholders?

Corporations Andrew H. Chen, Distinguished Professor of Finance, Cox School of Business, Southern Methodist University How can management deliver va...
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Corporations

Andrew H. Chen, Distinguished Professor of Finance, Cox School of Business, Southern Methodist University

How can management deliver value for shareholders?

James A. Conover, Associate Professor, College of Business Administration, The University of North Texas

John W. Kensinger, Professor, Hochschule fur Bankwirtshaft, and Professor, College of Business Administration, The University of North Texas

Abstract Although there is growing discussion about share value as a management goal, the ways to enhance value sometimes seem mysterious to executives. Indeed, the commentary surrounding the recent accounting scandals has questioned the validity of share value maximization as a business goal, but has yet to clarify the reforms that are really needed. Since 1980, though, a wealth of evidence has grown that reveal five proven ways to increase share value. One of them is pleasant for managers and employees, but it is very difficult to accomplish. The other proven paths to increased share value are easier to implement, but are unpleasant for managers. Valuebased incentive systems often focus exclusively upon cash flows relative to resource investment; yet, share values are often based on much more than just the expected cash flows from already-existing operations. Indeed, the majority of share value in some firms may derive from the anticipation of growth opportunities (or other real options that enhance value by reducing risk or adding flexibility). So, the reforms needed in incentive systems should aim at motivating all of the proven paths to increase value for shareholders, and incorporate known methods for enhancing the value of real options.

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How can management deliver value for shareholders?

Growing emphasis on stock performance prompted incentive

The first proven way to increase shareholders’ wealth is to find

plans that try to encourage management to stimulate the

investment opportunities that beat the market, opportunities

'value drivers' for their companies. More recently, in the wake

that provide greater return for a given risk than investors can

of recent accounting scandals doubts have been raised about

find on their own in the world’s capital markets. This alone is

share value maximization as a valid management goal; in part

hard work. However, the problem is amplified by the need to

because of concerns that value-based incentives might moti-

do better than expected (Doing well is not enough to win

vate accounting shenanigans or even outright fraud, and in

extraordinary returns for shareholders; one must do better

part because of concerns that employees or other stakehold-

than could reasonably be anticipated based on publicly avail-

ers might be sacrificed in the pursuit of value for sharehold-

able information.)

ers. Resolving these concerns requires consideration of the large body of evidence now available concerning the proven

The flip side of the expansion lesson is that reducing the re-

ways to enhance share value.

sources committed to activities that lack competitive advantage (in the language of real options, exercising abandonment

Value-based management systems tend to focus upon cash

puts) can enhance value. McConnell and Muscarella (1985)

flows relative to resource value. Yet, share values are often

provide an example of this using natural resource companies.

substantially greater than what could be justified based on

Although on average share value increases with announce-

expected cash flows from existing operations. Woolridge (1995)

ments of capital expenditures, their data reveals the opposite

provides evidence that more than half the value of a stock is

response for announcements of spending on oil and gas explo-

typically based upon something besides the next five years’

ration. The problem is that admitting defeat is not pleasant for

expected earnings. The present value of growth opportunities

management, and the resulting dislocations are not pleasant

or expectations of receiving a premium price during an acqui-

for former employees or their communities. In order to over-

sition typically account for the majority of share value.

come these impediments, incentive plans need to reward management for showing wisdom in recognizing when a game is

The value drivers are not necessarily mysterious, just difficult

no longer worth playing. Also, it could be advantageous to pro-

or unpleasant to implement. Since financial economists devel-

vide compensation for the short-term costs of dislocation.

oped the event study methodology more than two decades ago, there has been a wealth of research that ‘reads the tracks’

Paying out cash is another proven method for increasing share-

in the stock data to discover what events tend to change share

holders’ wealth. Promises alone don’t count; there must be

value in consistent fashion. The evidence simplifies to five

concrete commitment. Of course, this involves an admission

proven ways to increase shareholders’ wealth. Only one of

that management can not find competitive investment oppor-

these proven paths is enjoyable, and it is very difficult. The

tunities, and may reduce the means available for exercising

others are painful to implement and so are not chosen happily.

real options that do exist. Ultimately, this also leads to gradual

In order to be complete, incentive plans should embrace all of

liquidation of the business. The dislocations that are involved

these proven paths to share value in ways that provide reward

for employees and their communities are more gradual than

for success in the face of difficult challenges and offer com-

those associated with plant closures, but the loss of opportu-

pensation where implementation would otherwise be too

nity at home is still a source of pain in societies that place a

painful. Since these proven ways to enhance share value

high value on ties to family and community.

include real options in several respects, financial economists

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can offer a set of tools to aid in this process. (The concept of

A fourth proven way to increase shareholders’ wealth is to

‘real options’ is defined more fully in the next section, below.)

spin off any business units or asset pools that can stand by

Journal of financial transformation

How can management deliver value for shareholders?

themselves (in the language of real options, preparing for the

Let us start with the definition of a security given by the U.S.

possibility of a spin-off involves creating new options that did

Supreme Court: ‘[A security is] a contract, transaction, or

not previously exist). Spin-offs that place stock in the hands of

scheme whereby a person invests his money in a common

shareholders generally work better than sell-offs that put

enterprise and is led to expect profits solely from the efforts

money into the corporate coffers for management to spend.

of the promoter or third party.1 This is an interesting perspec-

Yet this, too, leads to reduced power and prestige for man-

tive, because it shifts the emphasis to function rather than

agement, and fewer opportunities for cash flows from strong

form. Any sort of contractual agreement, transaction, or even

activities to support weak activities within the firm. Without

an informal arrangement could qualify under this definition.

such support, cessation of weak activities is accelerated, along

The focus is on the nature of the activity and the expectations

with the accompanying dislocations that are painful at least in

of the participants. One of the key points is that the arrange-

the short term.

ment involves a ‘common enterprise’ – in other words, a team effort that requires cooperation among a group of players.

Sometimes the most lucrative of all the proven ways to

Another key point is that the investors are not directly

increase shareholders’ wealth is to be acquired by another

involved in the team effort, but instead anticipate profits sole-

company. There is strong evidence that shareholders of acqui-

ly from other peoples’ efforts.

red firms receive substantial abnormal positive returns. This does not work in reverse, however – the stockholders of firms

Thus, there are several essential elements of valuation that

that buy other companies are lucky to break even, and may

must be considered when identifying the value drivers of a

experience losses. Yet being acquired may mean loss of power

company’s stock. As mentioned above, value-based manage-

and prestige for executives, or complete job loss. Sale of as-

ment systems focus exclusively on cash flows generated from

sets or cessation of operations may also follow the acquisition.

a company's assets, even though it has been proven that most of the value actually comes from other sources, such as the

One could also identify a bonus proven way to increase share-

hope of receiving a premium price in an acquisition.

holders’ wealth, but it is not really a unique path. Several studies have shown that changes in corporate governance are

Besides growth opportunities, other real options may enhance

value enhancing. In the end, the issue is corporate control. We

value by reducing risk or adding flexibility. For example, aban-

know that controlling blocks of stock are worth more per share

donment options provide the possibility of recovering capital

than non-controlling blocks [Lease, McConnell, and Mikkelson

if a particular venture is not as successful as originally expect-

(1983)]. Why does control have value? The reason is that

ed. Risk can also be reduced by options to suspend operations

greater accountability to shareholders increases the likelihood

when conditions deteriorate and then resume when conditions

that management will follow one or more of the painful steps

improve. Real options may also enhance opportunity. For

just listed.

example, options to pick the most lucrative among several different activities enhance potential profitability. Value-based

What drives share value?

incentive systems could be improved if they explicitly reward

The focus of value-based management incentive systems is to

management actions that create or enhance the real options

reward corporate employees for doing things that enhance

for the firm.

share value, while discouraging them from undertaking activities that reduce share value. The greater one's understanding

Since investors' profits are dependent on the efforts of the

of what drives the value of a particular stock, the better these

company's management team, the firm’s human capital is

systems can be designed.

another source of value. The team must have the knowledge

1

S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298, 299 (1946).

95

How can management deliver value for shareholders?

and capabilities necessary to succeed, and be willing to share

Some proven ways to increase share value

the fruits of success with the investors. Specifically, we must

Find investment opportunities that beat the market

focus on the organizational capital and the incentive struc-

Of the five proven ways to increase share value, only the first

tures. Organizational capital consists of the value derived from

is enjoyable for managers. This is to expand in areas of com-

human capital that remains with the organization even if key

petitive advantage. On average, shareholders’ wealth increase

individuals depart (examples are proprietary knowledge

upon announcement of investments such as research & devel-

recorded in corporate databases, organizational reputation, or

opment or new plant and equipment, and vice versa, share-

group culture). The incentive structure is critically important

holder wealth tends to decrease with declines in such spend-

because it influences the likelihood of success and the way the

ing [McConnell and Muscarella (1985)].

fruits of success are distributed. Find better business unit strategies than anyone Finally, value is determined not only by the perception of com-

expected you would

petitive advantage, but also by its sustainability. Such an ad-

There are two factors that contribute to the difficulty of this

vantage provides economic rents from established operations,

path. First is the problem of gaining sustainable competitive

plus options to expand into new activities. A strong advantage

advantage. Second, the efficiency of the capital market makes

with a short expected life may be less valuable than a moder-

the problem of gaining exceptional returns for shareholders

ate advantage with a long life.

even more difficult for management. Given efficient capital markets in which all publicly available information is reflected in stock prices, management must do better than expected in order to realize abnormal gains in shareholder wealth.

Proven ways to increase share value

Positive net present value results from improved resource allocation through cooperation or innovation. There would be

1. Find investment opportunities that beat the market

no positive NPV if individuals could accomplish the same

■ Find better business unit strategies than anyone expected you would

actions on their own. In order to create positive NPV opportu-

■ Winning is not enough; you have to beat the point spread

nities, managers must do something that stockholders cannot

■ Take actions that generate unexpected opportunities for the future

do by themselves.

2. Stop non-competitive activities 3. Sell assets and pay out cash (promises about future dividends do not count) ■ Sell equipment, real estate, or whole divisions ■ This leads to gradual liquidation

In order to gain positive net present value, management must establish sustainable competitive advantage based on its ability to produce goods or services at lower cost than their competition, or successfully differentiate their product so that customers are willing to pay premium prices. This route involves striving to be the most efficient in the world or the best in the

4. Spin off any divisions that can stand alone

world, obviously challenging tasks.

5. Be acquired by another company

When any business is able to earn economic rents, competitive threats are sure to develop. Threats may come from new

Bonus: Change corporate governance so that these

entrants, or enhanced capabilities developed by existing

actions are more likely.

industry rivals. In order to succeed in creating value, management must command the means to counter threats from

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Journal of financial transformation

How can management deliver value for shareholders?

either of these sources. Yet, threats may also arise from cus-

Investors are very savvy about anticipating future opportuni-

tomers who decide to integrate backward and become their

ties and recognizing firms that are well positioned to eventu-

own suppliers, or learn to adopt less costly substitutes.

ally take advantage when the appropriate time arrives.2

Another source of threat against sustainable competitive advantage lies in the company’s suppliers. If they have power

Stop non-competitive activities

over the sources of essential inputs, they will demand higher

An obvious extension of this lesson is to stop doing things that

prices (labor unions are an example, with wage and benefit

are not competitive, and release the resources to migrate

increases demanded whenever profits increase).

toward higher-valued uses. For example, when Texas Instruments announced plans to close an inefficient plant, the news

Finding opportunities that provide a competitive advantage is

was greeted with an immediate and substantial stock price

difficult enough. Developing means to protect it for sustain-

increase. This is not an isolated phenomenon. Scientific evi-

ability further complicates the challenge. There is another

dence is available demonstrating that cessation of non-com-

challenge for management, though, in the efficiency of the

petitive activities tends to be associated with gains in share-

capital market.

holder wealth. McConnell and Muscarella (1985) first noted this, when they found that increases in spending for oil exploration

Winning is not enough; you have to beat the point spread

are associated with decreases in share value, and vice versa.

It is not enough just to expand in the areas of competitive advantage. One must do better than expected. When the cap-

The problem is that admitting defeat is not pleasant for mana-

ital market is efficient, management must bring surprises to

gement, and the resulting dislocations are not pleasant for

the public in order to gain abnormal returns for shareholders.

former employees or their communities. In order to overcome

Just to maintain average returns, management must accom-

these impediments, the wisdom to recognize when a game is

plish what is expected of them – not to meet expectations

no longer worth playing should be rewarded appropriately.

would result in price decline. In order to coax a price increase,

Also, it could be advantageous to provide compensation for

management must deliver even more than investors have pre-

the short-term costs of dislocation, as is often done in sever-

dicted. Only a positive surprise will make the price rise more

ance packages.

than the normal drift that is built into security prices. Shutdown need not be permanent. The core source of value So, it is not enough to win the game, one must ‘beat the point

for timing options is that operations can be halted when the

spread’ and win by a greater margin than the market expected.

value of output falls short of the cost of production, and then

(Conversely, even poor performance on the playing field could

restarted when market conditions become favorable again.

result in positive abnormal returns for shareholders, provided

Impediments to exercise cause decrease in the value of the

the performance was not as bad as expected.)

option, so it can be worthwhile to pay the price for reducing such impediments.

Take actions that generate unexpected opportunities for the future

Sell assets and pay out cash

There is a flip side here: the market’s propensity to anticipate

(promises about future dividends do not count)

the future can be an advantage for management today. Mana-

Another proven way to increase shareholder value is by pay-

gement actions that generate new opportunities for the future

ing cash to investor via extra dividends or share repurchases

can have substantial immediate impact on share value, even

[Dann (1981)]. Stated simply, investors appreciate getting their

when the realization of expectations remains in the future.

money back when management lacks opportunities to invest it

Strategy, after all, is about taking advantageous positions.

at a higher return than investors can earn on their own, at the

2 The real-options approach provides a well-developed methodology for understanding the way options for future action can influence value today. The Real Options Group provides useful information about the real-options approach on the worldwide web at http://www.rogroup.com.

97

How can management deliver value for shareholders?

same level of risk. The positive effects of repurchase announ-

In several cases real estate assets have been transferred into

cements go beyond the amount of money involved in the

master limited partnerships, with consistent increases in

immediate transaction, but reflect real changes that accom-

shareholder wealth that are inversely proportional to the frac-

pany the event (such as shifts in capital structure, reduced

tion of partnership units retained by the parent company

taxes, or signaling of management intentions for the future). If

[Khanna and McConnell (1998)]. Natural resources such as oil

the benefit is attributable to signaling, moreover, it follows

and gas production assets also produce enhanced value for

that management cannot later alter course toward a return to

shareholders when they are established as separate asset

spending in uncompetitive areas without risking substantial

pools. Again, value for shareholders is greater the smaller the

damage to stock value.

fraction of ownership retained by the parent company [Kensinger and Martin (1990)].

This is another form of the abandonment or timing option that does not involve immediate cessation of operation. The action

Whole divisions can be sold. One way to get rid of ‘poor fits’ is

involved here is to remove resources from the firm while con-

to sell them to another company.

tracting for replacements under terms that have shorter time horizons. For example, owning a piece of equipment may rep-

This leads to gradual liquidation

resent a package of options to use the equipment for a con-

Cash disbursement may seem like an admission that manage-

version process (converting input items into output items).

ment can not find competitive investment opportunities.

This portfolio would include options with expiration dates

Ultimately, too, it may lead to gradual liquidation of the busi-

ranging from the short term all the way to the end of the

ness. Corporate hollowing could be positive, though. Indeed, it

asset’s life. If the values of the longer-term real options in this

can accompany improved focus on the core capabilities of the

package have declined, it could be advantageous to sell the

firm. The additional duties associated with corporate owner-

equipment and replace it via lease arrangement (such decline

ship of assets could actually divert valuable management

occurs as an activity becomes more competitive and the market

attention away from the areas in which the firm possesses unique

values of input and output items move in a more synchronized

advantage. Disencumbering from unnecessary distractions

pattern). The lease arrangement would then represent a sub-

could substantially enhance future opportunities for the firm.

set of the original package of real options, with expiration

Investigations show that increased corporate focus, or

dates ranging only to the end of the lease contract. So, the

reverse-diversification, leads to positive shareholder wealth

only real options given up would be the longer-term options in

effects [Comment and Jarrell (1995)].

the original package (whose values have declined). Selling would be advantageous if the value received for selling the

Another positive feature of asset sales is improved governance.

equipment, plus the value of the options package accompanying

The ideal governance structure may be very different for a

the lease, exceeds the value of the options package given up.

pool of assets such as real estate, compared with the ideal governance structure for a business unit. In the traditional cor-

Sell equipment, real estate, or whole divisions

porate venture, the investor’s fate is in the hands of someone

Firms can generally enhance share value by selling readily

else. When a business’ environment is rapidly changing,

marketable assets such as real estate. For example, stock

investors may willingly make this concession in order to

value generally tends not to fully reflect the value of corporate

enable quick response by management. Yet caretaker func-

real estate holdings. The conclusion: companies should sell

tions in the management of real estate may require much less

such assets and employ leasing arrangements to provide the

responsiveness than management of a business unit in a

use of necessary real estate assets [Brueggeman et al. (1990)].

changing environment such as pharmaceuticals research. With another governance structure, though, the investors can

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Journal of financial transformation

How can management deliver value for shareholders?

provide safeguards to protect their interests, so that they have

flicts that occur when the parts interfere with each other, and

more than a vote at the annual meeting as a means of direct-

probably won’t hurt, except in the rare event that synergies

ly influencing management action.

actually arise from corporate ownership of assets.

In a path-breaking analysis of corporate governance, Berke-

Still, there is a possible complication due to the value of con-

ley’s Oliver Williamson (1988) identifies three categories of

trol. If the sale of assets is a defense against possible takeover

governance structure: debt, equity, and dequity. With debt

threats, by eliminating the assets that make it an attractive

financing, governance is by rules that are negotiated prior to

target, there may be a negative aspect that could outweigh

the financing, and cannot readily be altered without undergoing

the positive factors.

refinancing. Equity governance, in contrast, involves few, if any, unchangeable rules. With equity financing, management

Spin off any divisions that can stand alone

has broad flexibility and can thus react quickly to a changing

Several studies have verified that spinning off divisions

environment. Dequity governance involves rules negotiated

enhances shareholder wealth, and that spin-offs generate

prior to financing, but provides mechanisms for changing the

higher returns than sell-offs, in which corporate management

rules if circumstances change (leveraged buyouts, for exam-

retains control of the cash from the sale [Hite and Owers

ple, incorporate the dequity approach to governance). Thus

(1983)]. There are various financial considerations involved.

debt is the ideal governance structure in very stable environ-

First, in the United States spin-offs are not taxed when share-

ments, equity is the ideal governance structure in rapidly

holders in the parent company receive at least 80 percent of

changing environments, and dequity provides a compromise in

the shares in the new company. Additionally, the spin-off pro-

the middle ground. Selling assets enhances value when it

vides a wider array of choices from which investors can pick.

allows custom tailoring of governance structures for different

The spin-off makes the capital market more complete. Spin-

parts of the corporate entity. Hybrid financial structures that

offs also allow managers of the parent company to focus bet-

provide dequity governance also tend to give better treatment

ter on the firm’s primary activities, with incentives clearly

to investors in event of financial difficulties [Franks and Torous

focused on the performance of the core business. Finally, spin-

(1994)].

offs assure investors that profits from a strong part of the company will not be siphoned to support an ailing division.

We must also ask whether asset ownership is necessary to maintain a firm’s ability to produce economic profits (economic

The benefits are not confined to financial considerations. The

profits occur only when revenues exceed all costs, including

parts tend to perform better separately than they did together

the cost of capital). There may be situations in which the com-

[Cusatis, Miles, and Woolridge (1994)]. One important reason

petitive environment of the enterprise requires corporate con-

is that managers of the spun-off company can be given

trol over certain assets or business units. In such unusual and

options or other incentives based upon the stock of their com-

transitory situations, selling them would be delayed. The tech-

pany, thus improving the alignment of management goals with

nological environment of the enterprise might also call for cor-

those of the shareholders.

porate ownership of certain assets necessary to maintaining proprietary capabilities. The general economic environment of

Accomplishing a spin-off requires advance preparation that

the enterprise may also require management flexibility that

involves option-like characteristics. Of course, the firm must

accompanies corporate ownership of critical assets or capabil-

first possess the nugget for a spin-off, and this represents an

ities. In the absence of any of these requirements for corpo-

unrefined real option. Then resources must be invested in pre-

rate ownership of assets, we can conclude that selling assets

paring a record of independent accounting data that can sup-

is generally a good bet because it might help, by reducing con-

port the issue of new stock. Organizational interconnections

99

How can management deliver value for shareholders?

must also be revised in advance in order to make a smooth

plished by independent companies through hedging with

separation of organizations. Actions can be taken to enhance

futures, options, swaps, or other derivatives. In general, diver-

the potential value of the new ‘child’ to be created from the

sification that merely reduces risk has no market value,

parent company. Via this refinement process the value of the

because shareholders can diversify their own portfolios (the

real option is enhanced. Since it can be a long process, involv-

appropriate question is whether an action taken by manage-

ing the cumulative product of several years’ efforts, properly

ment improves the portfolio of a diversified investor).

aimed incentives could greatly assist in achieving success. Business unit managers should be rewarded for steps that

The value of control

lead eventually to independence. Key variables include in-

This leads to the sixth ‘bonus’ path to enhanced value. In gene-

creases in the value of the underlying asset (the business unit

ral, value is inversely proportional to the level of protection

as an independent entity), increased volatility (improved

against challenges to management control. We have long

prospects for future value gains), and decreases in the exer-

known that creation of poison pills, in order to discourage

cise price (the cost to the parent for replacing lost services).

takeover attempts, decrease share value [Jarrell and Poulsen

Be acquired by another company

takeovers generate positive gains while defensive measures

Sellers generally do better than buyers in acquisitions. Pionee-

aimed at preventing takeovers are detrimental for shareholder

ring investigators report that the shareholders of acquired

value [Jensen and Rubeck (1983)]. Changes in the corporate

firms received on average post-announcement premium of

charter or the composition of the board of directors, therefore,

(1987)]. Indeed, there is substantial evidence that corporate

28%, when compared to the pre-bid price [Franks, Harris, and

can be value-enhancing if the changes make it more likely that

Titman (1991)]. Thus the ‘strategic’ premiums available through

non-competitive activities will be reduced, assets sold (with

being acquired provide a far superior payoff than initial public

proceeds paid to shareholders), divisions spun off, or the com-

offerings or other methods of harvest.

pany acquired. The problem, according to Harvard’s Michael

The flip side is that managers should avoid buying other firms.

gorge the cash rather than investing it below the cost of capi-

Franks, Harris, and Titman (1991) report an average decline of

tal or wasting it in organizational inefficiencies.’

Jensen (1986, p. 323) ‘is how to motivate managers to dis-

1% for shareholders of acquiring firms who announce intentions to acquire other firms. What is good for shareholders, though, can be distasteful to management. Being acquired can lead to loss of position, income, and prestige. Even worse for the founder of a business, the acquisition can lead to loss of something that was previously the center of existence. There appears to be value created in mergers, on average. Franks, Harris, and Titman (1991) report an average gains of around 4% for the total package of buying and selling firms – but the buyers generally pay too much, allowing a disproportional amount of value to accrue for the stockholders of the acquired firm. Of course, there is no value created in mergers that merely internalize risk sharing that could be accom-

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Journal of financial transformation

How can management deliver value for shareholders?

Concluding remarks

References

After two decades of ‘reading the tracks’ in stock prices there



Brueggeman, W.B., J. D. Fisher, and D. M. Porter, 1990,

is now substantial evidence showing what it takes to manage



’Rethinking Corporate Real Estate,’ Journal of Applied Corporate Finance, 3:1, 39-50. Comment, R., and G.A. Jarrell, 1995, ‘Corporate Focus and Stock Returns,’



Journal of Financial Economics, 37, 67-87. Cusatis, P., J. Miles, and J.R. Woolridge, 1994, ‘Some New Evidence that Spin-offs Create Value,’ Journal of Applied Corporate Finance, Summer, 100-107.

beyond the control of management, there are a handful of



Dann, L., 1981, ‘Common Stock Repurchases: An Analysis of Returns to Bondholders

proven ways that are associated with gains in shareholder



and Stockholders, ‘ Journal of Financial Economics, 12:4, 409-436. Franks, J. R., R. S. Harris, and S. Titman, 1991, ‘The Postmerger Share-Price

a company for shareholder value. Although there are inevitable frustrations resulting from market-wide factors

wealth. The route that is associated with expansion of the organization is also associated with innovation, improved



inter-company cooperation, or the ability to maintain market

Performance of Acquiring Firms,’ Journal of Financial Economics, 29:1, 81-96. Franks, J. R., and W. N. Torous, 1994, ‘How Shareholders and Creditors Fare in Workouts and Chapter 11 Reorganizations, Journal of Financial Economics, 35, 349-370.

power. None of these is easy, and too much market power may



even lead to difficulties with regulators. The remaining routes



G. Jarrell and A. Poulsen, 1987, ‘Shark Repellents and Stock Prices: The Effects of



Antitakeover Amendments since 1980,’ Journal of Financial Economics, 19:1, 127-168. Jensen, M.C., 1986, ‘The Agency Cost of Free Cash Flow, Corporate Finance and

are associated with reduction in the size and scope of the management empire. So, the inherent conflict of interest

Hite, G. L., and J. E. Owers, 1983, ‘Security Price Reactions around Corporate Spin-Off Announcements,’ Journal of Financial Economics, 9:2, 113-138.

between owners and managers must be overcome by incen-



tive systems that motivate all of the proven paths to increased

Takeovers,’ American Economic Review, 26. Jensen, M. C., and R. Ruback, 1983, ‘The Market for Corporate Control: the Scientific Evidence,’ Journal of Financial Economics, 11:1, 5-50.



Khanna, A., and J. J. McConnell, 1998, ‘MIPs, QUIPs and TOPs:



Old Wine in New Bottles,’ Journal of Applied Corporate Finance, 11, 39-44. Kensinger, J. W., and J. D. Martin, 1990 ‘Valuation Effects of Rollout Publicly-Traded

these proven ways to enhance share value. These links to real



11:3, 143-153. Lease, R. C., J. J. McConnell, and W.H. Mikkelson, 1983, ‘The Market Value of Control

options provide ‘handles’ that could be used to link desired



in Publicly-Traded Corporations, Journal of Financial Economics, 11, 439-471. McConnell, J. J., and C. J. Muscarella, 1985, ‘Corporate Capital Expenditure Decisions and the Market Value of the Firm,’ Journal of Financial Economics, 14, 399-422.



Williamson, O. E., 1988, ‘Corporate Finance and Corporate Governance,’



Journal of Finance, 43, 567-91. Woolridge, J. R., 1995, ‘Do Stock Prices Reflect Fundamental Values?,’

value for shareholders.

Partnerships in the Oil and Gas Industry,’ Managerial and Decision Economics,

We have identified several links between real options and

actions with value-based management incentive systems. Some of these links have already been forged into incentive plans. For example, 3-M Corporation rewards business unit leaders based upon the proportion of revenues received from

Journal of Applied Corporate Finance.

new products – thus explicitly rewarding innovation. More of the same will be helpful.

101

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