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Knowledge Co-Creation - Profiles of researchers

Seeking a Form of Corporate Valuation Mutually Beneficial to Shareholders, Employees, Consumers, and Citizens

Tomoki Oshika
Associate Professor, Faculty of Commerce, Waseda University

Making accounting information more valuable

My specialty is corporate valuation, which is part of the field of accounting. Generally, when corporate value is mentioned, most people think of the value for shareholders, as is represented in the stock price. It is of course true that in US-style capitalism, corporate management is required to prioritize value for shareholders. If this is taken at face level, this would mean that it would be desirable to cut costs such as personnel costs as much as possible. However, this approach seems overly simplistic.

The definition of corporate values differs by one’s viewpoint, viewpoints that include shareholders, employees, business partners, consumers, and local residents. For example, employees find value in companies that pay high salaries, business partners find value in companies that allow them to achieve high profits through trade, consumers find value in companies that provide good products at lower prices, and local residents find value in companies that are as friendly as possible to the local environment and provide many employment opportunities.

At first glance, it seems that these types of values would come in conflict with each other. However, I do not think that is really the case. I approach my research from the perspective that there must be some form of corporate value that is mutually beneficial for all stakeholders and that would result in a win-win relationship for everyone.

In order to measure, analyze, and evaluate corporate value, the value must be expressed in a numerical way. Although it would be difficult to measure all of these values, some form of criteria to serve as a benchmark is required for comparing and making associations between each of these values. For this purpose, stock price, the valuation that the stock markets—that is, investors—grant companies, has been used as a benchmark. Although this may seem to contradict the explanation of corporate value initially made, if a win-win relationship can be confirmed, it could be understood that in the end increasing value to stake holders other than shareholders also leads to increasing value for shareholders, in other words that various types of corporate value are eventually incorporated in the stock price.

Corporate accounting can roughly be classified into managerial accounting that is used inside companies and financial accounting that is used for explaining companies to people on the outside. In other words, managerial accounting is a means to increase corporate value, while financial accounting is a means to communicate the results and current state of corporate activities. In corporate management, it is very important to verify whether the results aimed for in managerial accounting are properly communicated through financial accounting and that corporate value is being increased as intended. Corporate valuation is used to confirm that firms have created the value suggested by the information revealed through financial accounting. In this manner, corporate valuation serves as a bridge between managerial accounting and financial accounting.

The revitalization of the general meetings of shareholders and corporate value

In the end, estimates of corporate value are represented through mathematical models. Investors make predictions on future earnings, cash flows, dividends, and other aspect of performance based on the figures contained in accounting information in order to estimate corporate value and make investment decisions. As accounting information only represents past and present performance and financial position, investors use this information to make predictions, and in the end use theoretical calculations to estimate corporate value.

Although it is a field that requires some knowledge of mathematics and statistics, research that allows one to reach a clear answer through calculation just happens to suit my personality. When I was working on my masters, I studied several major corporate valuation models, and afterwards I focused on the drivers of corporate value using these types of models to measure them.

One of the themes I focused on initially was the impact of the revitalization of the general meetings of shareholders on corporate value. I studied abroad at the University of Chicago in the second year of my doctoral program. With another doctoral academic met in the USA, Gilles Hilary, we became very interested in corporate racketeers and general meetings of shareholders. In Japan, general meetings of shareholders that are arranged to go off without any trouble by getting through reporting in a short period of time and ending in applause have been considered to be ideal. However, when looking for joint research themes, we discovered that the amount of time used by general meetings of shareholders has grown significantly from the 1990s to the 2000s.

While meetings ended between an average of around 20 to 30 minutes during the 1990s, entering the 2000s the average meeting length grew to approximately 40 minutes or almost double. While the length of meetings has not grown any further, this can still be considered to be a significant change. We wondered whether this increase in the length of meetings could be considered as a benchmark for demonstrating the revitalization of the general meetings of shareholders and decided to conduct empirical study on the hypothesis that the stock prices of companies demonstrated to have revitalized the general meetings of shareholders would be increased based on the valuation by shareholders and the stock market.

We deemed companies as revitalized that held general meetings of shareholders from 2000 to 2003 that were both 1.5 times longer than the average length of general meetings of shareholders held during the 1990s and that held general meetings of shareholders with a length of 60 minutes or more. As a result, we discovered that the stock market responded favorably to these companies and that their stock prices had risen. Furthermore, we found that the earnings forecasts released by these companies were highly accurate (Exhibit 1). In other words, if information disclosure that takes into consideration the needs of shareholders is conducted, this will be reflected faithfully in the behavior of shareholders.

It is likely that many managers still think that taking time on general meetings of shareholders simply results in extra costs. However, our research demonstrated that the revitalization of general meetings of shareholders is tied with increased corporate value.

Exhibit 1. Empirical study on the relationship between the revitalization of the general meeting of shareholders and corporate value

CO2 emissions control and corporate value

From the perspective of environmental management, we also conducted research on the relationship between carbon dioxide (CO2) emissions and corporate value. In terms of the environment, management tends to act in compliance with government regulations, but is reluctant to make any further voluntary efforts to be environmentally friendly because such efforts would supposedly only result in extra costs and pose no benefits to management. However, it turns out that we were able to show through our research that corporate value is higher for companies with low CO2 emissions.

Based on the Act on Promotion of Global Warming Countermeasures of 2006, companies for which CO2 emissions exceed a certain level are required to report to and conduct information disclosure through the Ministry of the Environment. Out of these companies, we decided to conduct an empirical analysis on 1,000 listed companies mainly in the manufacturing sector, looking at the levels of CO2 emissions and profits in 2006 and stock prices around May 2007 after annual results were released.

As a result, we found that in anticipation of future benefits, the stock market views favorably companies that spend money on the environment, even if current profit levels are reduced (Exhibit 2). For example, when comparing companies that are similar for several conditions, such as current profit levels, the stock price is higher for companies with lower CO2 emissions than those with higher CO2 emissions. This can be viewed that shareholders do not simply have a favorable impression towards environmentally-friendly companies, but see these companies as being able to actually generate higher profits in the future, and this is reflected in the stock price.

Needless to say, another major contributing factor is the current fashion of people purchasing things like environmentally-friendly detergent even if it is somewhat more expensive. Various factors relating to CO2 emissions are evaluated favorably, such as companies being able to pay attention to consumer market trends and invest accordingly, and in this manner the forward-looking stock price is formed.

Exhibit 2. Empirical study on CO2 emissions and corporate value

Employee compensation levels and corporate value

Recently, our research has focused on the theme of employee compensation levels and corporate value. There is a CSR (corporate social responsibility) database that includes the results of questionnaires conducted with both listed companies and unlisted large companies. We used two types of data from this database in our research. One data point used was the average salary of all employees and the other was the average salary of 30-year-old employees. Because the average salary of all employees differs depending on the average age of employees for companies, we made adjustments incorporating these conditions. As a result, our analysis indicated that the higher salaries are, the higher the corporate value.

First, we found that for companies with high salary levels, sales per employee were higher, in other words productivity was higher. That employees with higher productivity should receive higher salaries should come as no surprise. In addition, the same can be said of profits when comparing salary levels and profits. For example, we found that by providing salaries 1.5 times higher than average, companies were able to produce profits 1.8 times higher than average, increasing the profits that remained for companies. The same applies for stock prices, as our research indicated that stock prices are higher for companies with higher salary levels.

Even if employee salaries are increased, if as a result employees work even harder, the company’s sales and value will increase as well. This makes both employees and companies happy, and in the end shareholders happy as well. There is certainly an equation that will satisfy everyone.

Communicating in words comprehensive to people in practical fields

The persuasiveness of corporate value as explained by financial statements is on the decline. Although traditional financial statements aim to summarize a company’s past financial events, a radical shift toward more prospective information is necessary to maintain their relevance.

Seminar camp in Karuizawa (September 2011)

For example, data on CO2 emissions and salary levels is not currently included in accounting information. However, if this data is something that is required by investors, I believe that it is my mission as a specialist to investigate how this data should be presented.

Although corporate valuation requires a certain amount of rigor, I am not a proponent of writing papers incomprehensible to anyone who is not a specialist. While of course I am not suggesting that this rigor should be sacrificed, I do feel that it is important for high-level research to be communicated in a manner that is easy to understand for lay people. To make a social contribution, results should be communicated in words that can be understood by practitioners, such as fund managers and economic analysts.

Tomoki Oshika
Associate Professor, Faculty of Commerce, Waseda University

Born in Tokyo in 1976. Graduated from the School of Commerce, Waseda University in 1998, and completed the master program at the Graduate School of Commerce, Waseda University in 2000. Studied at the University of Chicago Graduate School of Business from 2001 to 2002, and in 2004 completed the course requirements for the doctoral program at the Graduate School of Commerce, Waseda University. In 2000 served as research associate at the Media Network Center, Waseda University and in 2004 served as an assistant professor for the School of Commerce, Waseda University before assuming his current post in 2007. Served as a visiting researcher at Hong Kong Polytechnic University from September to December 2010 and at Nanyang Technological University from January to March 2011.