Bridge over ocean
1 November 2002 Financial Analysts Journal Volume 58, Issue 6

Growth, Corporate Profitability, and Value Creation

  1. Cyrus A. Ramezani
  2. Luc A. Soenen
  3. Alan Jung

Associating corporate performance and shareholder value creation with growth in earnings (or sales) has been the modus operandi in the investment industry. It has greatly influenced managerial compensation schemes and portfolio decisions. We shed light on the relationship between growth and performance by addressing two broad questions. First, what is the relationship between corporate profitability metrics, such as economic value added, and the company's earnings or sales growth rate? Second, does maximizing corporate profitability necessarily enhance shareholder value (as measured by Jensen's alpha)? Using multivariate analysis, we show that, although the corporate profitability measures generally rise with earnings and sales growth, an optimal point exists beyond which further growth destroys shareholder value and adversely affects profitability.

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