The Most Relevant Value Creation Indicator Under Competitive Dynamics of the Firm

21 Pages Posted: 17 May 2013

See all articles by Chawki Mouelhi

Chawki Mouelhi

University of Quebec at Rimouski - Department of Management Sciences

Jacques Saint-Pierre

Laval University

Date Written: January 4, 2013

Abstract

This paper shows the most relevant value creation indicator in a competitive economic equilibrium framework. We analyze the relationship between the cost of capital and the competitive dynamics of the firm. Several related propositions on the most relevant value creation indicator under a dynamic competitive setting are developed to establish the theoretical framework of the research hypotheses. A sample of 80 U.S. firms in convergence to equilibrium and cross section data are used in the empirical analysis. Firstly, we compare the costs of capital estimated from the CAPM with those from the Discounted Residual Income Model (DRIM). Using the competitive advantage period “T” as the forecast period in the DRIM, we have considered it as an ex ante model that takes into account the competitive dynamics of the firm. Secondly, we tested the explanatory power of the marginal return to cost of capital ratio from the DRIM compared to that of the CAPM. Finally, we tested the explanatory power of the marginal return to cost of capital ratio compared to the marginal performance spread (the difference between the marginal return on capital and the cost of capital). The results of difference tests, Cox tests, and J tests of Davidson and MacKinnon (1981) show that the marginal return to cost of capital ratio from the DRIM is the most valuable indicator of value creation.

Keywords: Corporate finance, Value creation, Indicators, EVA, DRIM

JEL Classification: G30, G12, C52, D51, D81

Suggested Citation

Mouelhi, Chawki and Saint-Pierre, Jacques, The Most Relevant Value Creation Indicator Under Competitive Dynamics of the Firm (January 4, 2013). Available at SSRN: https://ssrn.com/abstract=2266050 or http://dx.doi.org/10.2139/ssrn.2266050

Chawki Mouelhi

University of Quebec at Rimouski - Department of Management Sciences ( email )

Rimouski, Quebec G5L 3A1
Canada

Jacques Saint-Pierre (Contact Author)

Laval University ( email )

School of Business
Palasis-Prince Building
Quebec, Quebec G1K 7P4
Canada
418-839-9964 (Phone)

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