Economic Value Creation of Large Privately Held Companies Relative to Publicly Listed Companies

Thomas Ewers & Andreas Kofoed Sørensen

Student thesis: Master thesis

Abstract

This paper examines whether large privately held companies are better at creating economic value, relative to publicly listed companies. This paper finds that large privately held companies are able to outperform publicly listed companies in terms of value creation for both shareholders and the aggregate investors. The investigation was conducted by analyzing two samples; one consisting of large privately held companies, another consisting of publicly listed companies. In order to calculate the invested capital and net operating profit after tax for the companies, we performed a profitability analysis of the companies’ annual reports from 2002-2017, as well as an estimate of the weighted average cost of capital for each company for this same period. This enabled us to estimate the value creation for the investors, where the cost of capital was deducted from the return on invested capital to arrive at the relative value creation for the aggregate investors through the Economic Value Added-model. Furthermore, we investigated the profitability of the companies by calculating the value creation to the shareholders through a Residual Income-model. By deducting the required return on equity from return on equity, we were able to estimate value creation to the shareholders. In testing the significance of the results from both models, we were able to show that the findings of this paper are statistically significant. In addition, our statistical analysis showed which of the underlying variables were significant in the respective models, and by which of these variables the large privately held companies were able to significantly outperform the publicly listed companies. Specifically, we found that return on invested capital, return on equity and turnover rate were significantly higher for privately held companies relative to publicly listed companies. The most critical variables in the models were included in a sensitivity analysis comprising five scenarios. None of these scenarios resulted in significant changes in the results of the analysis, indicating that our results are resilient towards changes in assumptions and thus not driven by methodical considerations.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages112
SupervisorsKasper Meisner Nielsen