Impact of Productivity on Value Creation: An Empirical Evidence

Modern financial management posits that a firm must seek to maximize the shareholder value. Market value of the firm's shares is a measurement of the shareholder wealth. It is the shareholders'appraisal of the firm's efficiency in employing their capital. The capital contributed by shareholders is reflected by the book value of firm's share. In terms of market and book value of shareholder investment, shareholder value creation may be defined as the excess of market value over book value per share. The role of productivity in accelerating the pace of economic growth is well recognized in the literature on growth. In the neo-classical growth accounting framework, the growth of output is the sum total of the growth of capital accumulation, growth of labour and the growth of productivity or efficiency. Thus, for a given combination of factor inputs (capital and labour), the shifts in the production frontier are engendered by the improvements in productivity or efficiency. That is, productivity is nothing but excess growth of output over that ofinput(s) over time. A company creates competitive advantage when the value of its sales on the long term is higher than the total cost. When the market evaluates a company, it takes its long-term productivity generating capacity into account. Thus competitive advantage and the creation of value for shareholders are supported by productivity. Hence, the present study tried to empirically investigate the impact of productivity on value creation in Indian industries.