Determinants of Value Creation in Emerging Market Firms –– An Empirical Examination
This study examines the determinants of value creation in Indian firms using Partial Least Square Structural Equation Modeling (PLS-SEM) methodology based on approximately 43,000 firms representing 15 different sectors. Enterprise value multiples are used as proxies for market value effects. The study finds that the important determinants of value creation are leverage, profitability, cash flow, agency costs, dividend payout, size, discretionary expenditures and intangibility. The disciplinary role of debt in controlling agency costs is documented by the study. Highly leveraged firms tend to create lower value for firms. Firms with high intangible assets tend to have higher agency costs and higher valuation effects. Firms with high growth rate in earnings and cash flow will have higher valuation and profitability. Greater the size of the firm, higher is the value creation potential. Some evidence suggests that higher the discretionary expenditure intensity of firms, lower the value creation and profitability for firms. The study finds negative relationship between tax shields and cash flow. Agency costs are negatively related to cash flow and value creation. Liquid firms tend to have higher cash flows and higher valuation effects. Increased dividend payout signal to the market about the increased valuation effects for firms.
Valuation effects; Enterprise value multiples; Leverage; Agency costs; Intangibles; Discretionary expenditures; Firm size
G20, G31, G32
Kumar, R., and Sukumaran, S. (2019). "Determinants of Value Creation in Emerging Market Firms –– An Empirical Examination", Review of Economics & Finance, vol.17, no.3, pp. 79-92.