Valuation: Measuring and Managing the Value of Companies, Fifth Edition

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Why Value Value?

Value is the defining dimension of measurement in a market economy. People invest in the expectation that when they sell, the value of each investment will have grown by a sufficient amount above its cost to compensate them for the risk they took. This is true for all types of investments, be they bonds, derivatives, bank accounts, or company shares. Indeed, in a market economy, a company’s ability to create value for its shareholders and the amount of value it creates are the chief measures by which it is judged.

Value is a particularly helpful measure of performance because it takes into account the long-term interests of all the stakeholders in a company, not just the shareholders. Alternative measures are neither as long-term nor as broad. For instance, accounting earnings assess only short-term performance from the viewpoint of shareholders; measures of employee satisfaction measure just that. Value, in contrast, is relevant to all stakeholders, because according to a growing body of research, companies that maximize value for their shareholders in the long term also create more employment, treat their current and former employees better, give their customers more satisfaction, and shoulder a greater burden of corporate responsibility than more shortsighted rivals. Competition among value-focused companies also helps to ensure that capital, human capital, and natural resources are used efficiently across the economy, leading to higher living standards ...