An Empirical Study on Value-Based Performance Measures, Stakeholder Satisfaction and Stock Prices

Abstract

This paper examines the effects of three different types of performance measurements on the Dow Jones Industrial, Transportation, and Utilities company stock prices: traditional accounting based measures, value-added measures, and nonfinancial based measures. The accounting based measures are return on equity and return on assets; the value-added measures are market value-added and economic value-added; the nonfinancial measures are proxies of sales, times-interest-earned, and taxes representing customer and bondholder satisfaction, and government and society.  

Using cross-sectional data and regression analysis, the results indicate that all performance measures have the expected relationship with prices. Return on equity has a strong and positive effect on share values. Consumer satisfaction, measured by sales volume, also showed a strong relationship with stock prices. However, the significance of the relationship between bondholder satisfactions measured by the times- interest-earned ratio and prices varied from positive to negative and was insignificant. The effect of taxes paid by corporations as proxy for the government as a stakeholder and corporate social responsibilities on share values was mostly insignificant. Overall, the results show that stock price maximization as the primary goal of a firm may lead to the satisfaction of stockholders and consumers. However the relationship between price maximization strategy and bondholders and society satisfaction require further investigations.