This includes dividends, and perhaps more importantly, capital appreciation of the shareholders investments. Broadly, both are related to the capacity of the company to generate profits, and as a general rule higher profits, when measured in relation to invested capital, increase shareholder value. Companies earn profits from their operations and from continued investment in profitable ventures. Most investors now look to capital appreciation as being the prime motivation for investing in a company. Capital appreciation happens when the share price of the company s equity rises in the stockmarket.
Share prices can rise due to a variety of factors, of which earnings is only one.
What is happening here is that earnings have expanded in meaning to include the perceived profits that will accrue in the future, and the linkage of shareholders value with earnings is actually even stronger. Shareholder value is a long term concept Shareholder value is not about the day to day gyrations of the stock markets. It is, by definition, a long term concept which takes into account the secular rises in share prices and returns to shareholders. It is driven by the strategic success of the company as also its operational performance. In other words, it is the traditional drivers of value that drive shareholder value.