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Title: The information value of the concept of MICAP in German DAX 100 companies
Author: Dahlhoff, Jurgen
ISNI:       0000 0001 3402 2361
Awarding Body: Brunel University
Current Institution: Henley Business School
Date of Award: 2007
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The valuation and pricing of stock prices has been a longstanding issue in finance, especially the question of what drives shareholder value. Many finance scholars agree that a share price is composed of future cash flows discounted back to present value by using an estimate of the company's weighted average cost of capital (Black et a1., 2001; Damodaran, 1996; Rappaport, 1998). Rappaport (1986) has set the framework for a broader understanding of this topic and initiated an enduring debate. He proposed a framework of several value drivers, such as sales growth, operating profit margin, and cost of capital, which influence the value of a finn. However, in spite of a great deal of knowledge in this field, success rates of sustainable shareholder value creation in real-world companies remain scarce (Boston Consulting Group, 2000; Chan et al., 2001; Wiggins l!fld R~efli, 2005). Mauboussin and Johnson (1997) suggested analysing the valuation of companies from a different angle. They proposed market-implied competitive advantage period (MICAP) as a concept that intersects competitive advantage (strategy) and shareholder value creation (finance). Their rationale is based on the assumption that sustainable competitive advantage leads to superior returns during a limited period of time. Thus, among other value drivers, it is the duration of competitive advantage period that drives shareholder value and increases the value of a finn. Their idea is based on sound academic roots, for example from Miller and Modigliani (1961) and Copeland and Weston (1992), who perceived finite time periods of supernormal returns as a source of value. Rappaport's value driver model (1986) includes value growth duration which is aligned to the idea of competitive advantage period. Rappaport and Mauboussin (200 1) extended the idea of MICAP as part of a stock selection programme. However, albeit competitive advantage period or its related terms are well known in theory, it has always been a neglected value driver, as Mauboussin and Johnson (1997) argue. Regrettably, academic studies of MICAP do not exist. This thesis has taken up the idea of market-implied competitive advantage period and investigated whether it has information content from the viewpoint of equity capital markets. For an understanding of this topic, this thesis discusses competitive advantage, shareholder value, and efficient markets because contributions from these areas have been amalgamated in the notion of MICAP. The base line of argument is that companies intend to maximise the value of the finn (Damodaran, 1997; Jensen, 2001) and therefore strive for competitive advantage as a means of creating and increasing shareholder value. The discipline of strategy has developed different schools on how to achieve competitive advantage, such as the market-based (Porter 1980, 1985) and resource-based view (Kay, 1993). Either way, the ultimate goal is the increase of shareholder value, otherwise the strategy is not successful. A proxy for measuring the success of competitive advantage is supernormal growth, which exists as long as return on capital is higher than cost of capital. The duration of this time period is called the competitive advantage period. Theoretically, high MICAP companies should be more competitive than low MICAP companies as their specific competitive advantage periods are longer. Thus, MICAP should work as a better proxy for competitive advantage and its duration than existing ones. The unique approach of the model of Rappaport and Mauboussin (2001) employed in this thesis is that it starts with share price and attempts to reverse-engineer the value drivers of the company. This requires efficient, or at least semi-efficient, markets (Fama, 1970, 1991), as otherwise the reverse-engineering process would produce flawed data.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (D.B.A.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available