Equity (finance)

Abstract: The authors studied 43 successful American companies to discover the secrets of the art of American management. The firms were in various categories, including high-technology companies, consumer goods companies, general industrial goods companies of interest, service companies, project management companies, and resource-based companies. To choose the companies, six measures of long-term superiority (three are measures of growth and long-term wealth creation over a 20-year period, and three are measures of return on capital and sales) were selected and imposed: compound asset growth, compound equity growth, average ratio of market value to book value, average return on equity, and average return on sales. The superior companies had eight attributes characterizing their distinction. Each attribute is discussed in detail, with examples and anecdotes from the firms involved. The attributes are: (1) a bias for action-preferring to do something, anything, rather than performing endless analyses and convening committees; (2) staying close to the customer-learning and catering to the client's preferences; (3) autonomy and entrepreneurship--dividing the corporation into companies and encouraging independent and competitive thought within them; (4) productivity through people--making all employees aware that best efforts are vital and that they will have part of the rewards of the firm's success; (5) hands-on, value driven--insisting that higher-ups keep in contact with the company's essential business; (6) stick to the knitting--staying with the business the firm knows best; (7) simple form, lean staff-administrative layers are few, with few staff members at the top; and (8) simultaneous loose-tight properties--a climate combining dedication to the firm's central values along with tolerance for all employees who accept those values. The rational model of management is discussed, along with its history and implications in corporate functioning. A chapter on human motivation discusses some of the contradictions of human nature that are relevant to management and describes how they can be dealt with to everyone's benefit.

Abstract: We present a model of the effects of legal protection of minority shareholders and of cash-f low ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders and in firms with higher cashf low ownership by the controlling shareholder. RECENT RESEARCH SUGGESTS THAT THE EXTENT of legal protection of investors in a country is an important determinant of the development of its financial markets. Where laws are protective of outside investors and well enforced, investors are willing to finance firms, and financial markets are both broader and more valuable. In contrast, where laws are unprotective of investors, the development of financial markets is stunted. Moreover, systematic differences among countries in the structure of laws and their enforcement, such as the historical origin of their laws, account for the differences in financial development ~La Porta et al. ~1997, 1998!!. How does better protection of outside investors ~both shareholders and creditors! promote financial market development? When their rights are better protected by the law, outside investors are willing to pay more for financial assets such as equity and debt. They pay more because they recognize that, with better legal protection, more of the firm’s profits would come back to them as interest or dividends as opposed to being expropriated by the entrepreneur who controls the firm. By limiting expropriation, the law raises the price that securities fetch in the marketplace. In turn, this enables more entrepreneurs to finance their investments externally, leading to the expansion of financial markets. Although the ultimate benefit of legal investor protection for financial development has now been well documented, the effect of protection on valuation has received less attention. In this paper, we present a theoretical and empirical analysis of this effect.