The Shareholder Value Approach. Criticism using the Example of the Corona Crisis

Research Paper (undergraduate), 2020

24 Pages, Grade: 1,3


Table of contents

I List of figures

1 Introduction

2 Definition of terms
2.1 Cashflow
2.2 Profitability

3 The Corona Crisis
3.1 Causes
3.2 Economic consequences

4 The shareholder value approach
4.1 Explanation and classification
4.2 Shareholder value as a key figure
4.3 Shareholder value as a concept

5 Consequences of the corona crisis and links to shareholder value
5.1 Measures by the Federal Government
5.2 Links to shareholder value

6 Conclusion

II Bibliography

I List of figures

Figure 1: Strategic management

1 Introduction

Some 23.53 million people were confirmed as infected and about 810,00 deaths were reported worldwide. The COVID 19 pandemic is changing life as known until the start of 2020 at a drastic pace. The course and the effects herald the economic crisis in 2020.1,2

On Wall Street, the biggest slump in stock prices since 1987 was reported. Other indices around the world also lost heavily because economic life in many countries had largely come to a standstill. For 2020, the Federal Government expects the gross domestic product to decline by 6.3 per cent.3 The reasons for this are well known. The drastic restrictions make it impossible to continue to operate as usual. This means that there will not be a full recovery in 2021 either.4

Companies face countless challenges in this time of crisis. Strategies must be adjusted, and costs must be reduced due to the lack of sales to avoid possible company crises. But how rigorous should profit-oriented management be when the world has been caught off guard by an unprecedented pandemic? Is it possible to combine considerate and entrepreneurial action and how can the interests of all concerned be reconciled?

This paper aims to answer and guide these questions. The course of the crisis, the economic consequences and the political measures taken in Germany are discussed. The methodology makes use of current sources and evaluations and sheds light on the shareholder value approach from a historical perspective. It critically examines the application of the concept to the extent of the Corona crisis.

2 Definition of terms

2.1 Cashflow

The cash flow is the expression of the surplus of payments with an effect on net income to the difference between incoming and outgoing payments within a period. The basis for determining the cash flow is data from the annual financial statements of a company. The higher the cash flow, the greater the possibility of financing investments with their funds. This economic indicator is particularly important for this work when calculating shareholder value. Different types of cash flow can be distinguished.5

2.1.2 Operating and free cash flow

The operating cash flow describes the scope of a company to finance projects from its resources. If this value is reduced by the necessary replacement and expansion investments, the free cash flow is obtained. This reduced by accrued interest payments, is available for dividend payments to shareholders.6

2.1.2 Net operating cash flow and total cash flow

The net operating cash flow compares the cash inflows and outflows from the activities, which were recorded in the areas of production and sales during the respective period. Total cash flow also includes investments and profit distributions.7

2.1.3 Classification

The types of cash flow described above are now put into a logical order. The starting point for the considerations is the net turnover of a company. These are reduced by the cost of materials, production wages and capital required for operations. After taxes, the net operating cash flow is obtained.8

From this cash flow are deducted borrowed funds, the balance of interest payments made and received, capital expenditures and increased by proceeds from the sale of fixed assets as well as repayments from loans, resulting in the free cash flow.9

Free cash flow is calculated by adding the number of long-term borrowings and the issue value of any new shares issued, fewer debt repayments and dividend payments and the repurchase value of bonds.10

2.2 Profitability

Profitability is the ratio between a certain performance indicator and the capital employed in connection with it. It is one of the most frequently used business ratios. Different values can be applied in the calculation, from which different types of profitability can be derived.11

2.2.1 Return on total capital

In the payment-oriented approach, the return on total capital expresses the ratio of the surpluses resulting from the difference between payments received and payments made to the total capital employed by a company. This ratio is defined as the ratio of earnings per period, which considers the cost of interest on borrowed capital, and the sum of a company's equity and borrowed capital. A distinction is made between return on assets before and after taxes.12

2.2.2 Profitability on turnover

The return on sales is the ratio of profit for the period to net sales for the period. Here, too, a distinction can be made between pre-tax and post-tax earnings.13

2.2.3 Return on equity

The ratio of earnings per period to equity employed is determined. The result expresses the internal rate of return on equity. An analysis before and after taxes can also be carried out here.14

2.2.4 Leverage effect

The leverage effect describes the effect that debt financing has on the return on equity. It establishes a link between return on equity and return on total capital. It means that the return on equity increases with additional borrowing.15

If external funds are provided in part and the return remains the same, the return on equity increases compared to financing purely from own funds. This effect only exists if the interest rate on borrowed capital, which increases because of external financing, does not exceed the company's overall profitability. If this point is exceeded, the leverage effect is turned negative. Therefore, the interest rate on equity capital can be increased by raising the level of indebtedness of a company.16,17

3 The Corona Crisis

3.1 Causes

The COVID-19 pandemic (also known as the Corona crisis) is the global outbreak of the new respiratory disease COVID-19. On 31 December 2019, the outbreak of new pneumonia of yet unknown origin was confirmed in Wuhan, China. In January 2020, the disease developed into an epidemic in China and then into a global pandemic.18 The disease is caused by an infection with the previously unknown coronavirus SARS-CoV-2. There were massive cuts in the public and private lives of many citizens in many countries around the world during the pandemic. The third most devastating pandemic of the 21st century is widely covered by the media worldwide. It is a warning example of the rapid spread of disease in the networked, globalised world.19,20,21

The economic crisis in 2020 is one of the effects of the COVID 19 pandemic on society.22

3.2 Economic consequences

In many countries, social and economic life was largely shut down during ordered mass quarantines. As a result, factories were closed, and contact restrictions were imposed to prevent the spread of the coronavirus SARS-CoV-2. As a result, stock markets collapsed, global economic output fell, unemployment rose, and many countries sought international credit assistance.23

On Monday, 9 March 2020, a stock market crash, the so-called corona crash, occurred after the beginning of the price losses in the previous days. Other indices around the world also lost heavily because economic life in many countries had largely come to a standstill.24 There was a sharp fall in prices on the oil market, caused by a dispute and price war between oil exporters Saudi Arabia and Russia and a collapse in demand due to the Corona crisis, which had led to a 25% fall in oil prices since the beginning of the year.25,26

Despite short interim highs, both the Dow Jones and the DAX continued to lose heavily in the following weeks, so that both indices recorded a historically weak first quarter of 2020 with losses of 23 % and 25 % respectively.27

As a result, unemployment and short-time working increased in many countries due to shop and company closures.28,29 Many companies sent their employees to the home office, which has far-reaching consequences for mobility, for example for transport companies.30

From mid-March to mid-May, the DAX rose by more than 23%. The NASDAQ was higher in mid-May than before the pandemic. This reaction on the financial markets is explained by the measures taken by central banks and governments to secure the liquidity of some companies that dominate the financial markets (especially banks) and thus prevent their insolvency.31

4 The shareholder value approach

4.1 Explanation and classification

Shareholder value is the value available to the shareholders of a company.32 It is also known as the market value of equity. More generally, this can be referred to as enterprise value.33 It should be noted that this ratio is not only applicable to listed companies but is practicable regardless of the legal form and type of shareholders. Only the main interested parties are subsequently different.34 It is an indicator of business management that deals with the value of a company. The basis for its calculation is cash flow. In a broader sense the shareholder value approach is also a form of strategic management and can be subsumed under the generic term value-based management.35 The basic orientation of this concept is the concentration of corporate activities on increasing the value of the company.36

The principle of the shareholder value approach has its origins in the USA. In 1986 Alfred Rappaport published his book "Creating Shareholder Value" there. His basic statement was based on the indicator of shareholder value and showed the inadequacy of purely accounting values. On this basis, Rappaport drafted a guide to corporate management which aims to maximise this value.37

In principle, it became necessary to address this idea because many listed companies feared a takeover. Specialists in this field roughly determined the value of a company or parts of it and compared it with the stock market value. If the difference was positive, the company in question was a potential takeover candidate that could be sold at a profit.38

To protect the companies from takeovers, it was considered advisable to concentrate the company's activities on increasing its value.39

A further reason for the necessity of this concept is the comparatively low and limited informative value of accounting ratios. The explicit evaluation of management performance became increasingly important and variable, performance-related salary components were to be made measurable in terms of the extent to which they contributed to increasing the value of the company.40 The aim was also to put any future acquisition decisions on a sounder footing by creating new, more meaningful indicators. In the overall business picture, the concept can be classified as a strategy. The corporate culture and corporate philosophy, which in turn are based on the vision and mission statement, are of overriding importance. Based on the objectives of the company, a strategy is developed which can correspond to the shareholder value concept. The resulting processes must be planned, managed, coordinated, and controlled by the definition of a management concept41 (see Figure 1).


1 WHO, 2020

2 Ct. Bundeszentrale für politische Bildung, 2020

3 Bundesministerium für Wirtschaft und Energie, 2020

4 Ct. Deutsche Welle, 2020

5 Ct. Prof. Dr. Breuer, 2020

6 Ct. Prangenberg, et al., 2005

7 Ct. Prof. Dr. Breuer, 2020

8 Ct. ibid.

9 Ct. Prof. Dr. Breuer, 2020

10 Ct. ibid.

11 Ct. Prof. Dr. Breuer, 2020

12 Ct. ibid.

13 Ct. ibid.

14 Ct. Prof. Dr. Breuer, 2020

15 Ct. ibid.

16 Ct. ibid.

17 Ct. Prangenberg, et al., 2005, p. 14

18 Ct. Taylor, 2020

19 Ct., 2020

20 Ct. dts Nachrichtenagentur, 2020

21 Ct. Bundeszentrale für politische Bildung, 2020

22 Ct. ibid.

23 Ct. Deutsche Welle, 2020

24 Ct. Deutsche Welle, 2020

25 Ct. Norddeutscher Rundfunk, 2020

26 Ct. He & Horowitz, 2020

27 Ct., 2020

28 Ct. von Naumann & Oberpriller, 2020

29 Ct. Tagesspiegel Online, 2020

30 Ct. Pauly & Steinbrecher, 2020

31 Ct. Bartz, 2020

32 Ct. Rappaport, 1986, p. 3

33 Ct. Prof. Dr. Breuer, 2020

34 Ct. Prangenberg, et al., 2005, p. 10

35 Ct. ibid.

36 Ct. Prof. Dr. Breuer, 2020

37 Ct. Prangenberg, et al., 2005, p. 1 f.

38 Ct. ibid.

39 Ct. Prangenberg, et al., 2005, p. 1 f.

40 Ct. Prangenberg, et al., 2005, p. 1 f.

41 Hahn, 2006, p. VI f.

Excerpt out of 24 pages


The Shareholder Value Approach. Criticism using the Example of the Corona Crisis
The FOM University of Applied Sciences, Hamburg
Value-Based Controlling & Intern. Accounting
Catalog Number
ISBN (eBook)
ISBN (Book)
Value-Based Controlling, Assignment, Accouting, Corona, Corvid, Shareholder Value, Shareholder Value Approach Criticism, Shareholder Value Approac, Corona crisis, COVID 19
Quote paper
Felix-Sebastian Ament (Author), 2020, The Shareholder Value Approach. Criticism using the Example of the Corona Crisis, Munich, GRIN Verlag,


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