Value Creation and Appropriation of Firms : Concepts, Theories and Methodology

The issue of corporate performance had been vigorously addressed in the literature using traditional accounting metrics. However, contemporary studies now focus on corporate sustainability in terms of value creation and how constituents of a firm are compensated for their efforts at generating the value. The current research challenge is therefore on how to appropriately define and measure firm value, bearing in mind several stakeholders that have diverse and often conflicting interests in a firm. This paper fills this gap by using stakeholder perspective to explain the concept of value creation and by providing theoretical framework and methodology for measuring the value created and appropriated by a firm. It is established that value creation can be measured using (1) the difference between output value and inputs value, (2) the sum of the economic rewards given to stakeholders and 3) the true cash flows generated by a firm. The paper concludes that since the traditional accounting metrics have some limitations and since investors do not value accounting earnings but cash that is truly generated from a firm' operations, a quantity that denotes value to diverse stakeholders of a firm should be used to measure firm value