The impact of corporate financial performance on market value Essay

The impact of corporate financial performance on market value - Essay Example The process of internationalization, changes the possibility of creating higher values for the stakeholders (M. TÃ ³th, 2012). In a global business environment, we see different opinions calling for change of approaches to corporate governance and to control and manage companies in a way that will continue to achieve both effective performance and appropriate social accountability and responsibility(B.Tricker, 2009). The construct of firm performance is of central importance to management research because explaining variation in performance is an enduring theme in the study of organizations (e.g., Hoopes et al., 2003). Although firm performance has been recently proposed as a multidimensional construct that consists of many different aspects such as operational effectiveness, corporate reputation, and organizational survival (Richard et al., 2009), one of the most extensively studied areas is its financial component, the fulfillment of the economic goals of the firm (Barney, 2002; Venkatraman and Ramanujam, 1986). To assess the financial aspect of firm performance (i.e., financial performance), organizational researchers generally use either accounting-based measures of profitability such as return on assets (ROA), return on sales (ROS), and return on equity (ROE), or stock market-based measures such as Tobins Q and market return (Combs et al., 2005; Hoskisson et al., 1999; Hult et al., 2008). When the company grows as a result of a financial decision such as detention of profits, then that growth will be reflected on the current value of the shares on the grounds that it is the result of a reflection of what will happen in the future. The present value of the shares is the sum of the future cash flows, and this will be reflected on the accounting profits when they occur and they won’t reflect the historical accounting