In the strategy literature a lot of emphasis is placed on growth as a dominant business strategy. The finance literature, on the other hand, focuses more on economic profitability and value. This study empirically explores the significance of profitability and growth as drivers of shareholder value, measured by the market-to-book value (M/B) ratio in Indian banks. Profitability is defined as economic profitability; that is, the spread between return on equity and the risk-adjusted cost of equity. To compare the scenario in public and private sector banks, six leading banks ICICI Bank, Sate Bank of India, Bank of India, IDBI Bank, Axis Bank and HDFC bank of these sectors are selected for this study. Time series data for the period 2004–05 to 2011–12 has been taken and the major data source is the annual reports of the selected banks. Correlation and Multiple Regression analysis are used as the major analysis techniques. Thus our findings suggest that economic profitability and growth do not always contribute in shareholder value creation as in case of Indian banks. Other factors such as Capital Intensity, firm size and Business risk must also be examined for their contribution in shareholder value creation.
Shareholder Value, Economic Profitability, Spread, Growth, Capital Intensity, Correlation Analysis, Multiple Regression Analysis
