African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4050

Article in Press

The Efficiency Implications of Corporate Earnings Retentions

Ravi Thirumalaisamy

  •  Received: 22 January 2018
  •  Accepted: 12 March 2019
The study examines the efficiency of the investment of corporate income retention. If retained earnings are invested in positive net present value projects, they should enhance the shareholder value in the long run. It is believed that the stock market adds premium to a firm’s earnings when the firm signals more retention of earnings. However, the stock market is seen to reverse the discipline when such retained earnings are not put to effective use. This study uses a sample of 27 high-growth, profitable Indian firms and tracks their retained earnings for a period of 15 years from 2002 to 2016. The results indicate that the retained earnings were put to an ineffective use by these firms, and the financial performance metrics that form the basis for shareholders’ investment choices are misleading as the association of corporate profitability to shareholder enrichment is distorted. While firms gain profit, their shareholders sustain losses as their future cash flows from the investment of retained earnings are heavily discounted by the stock market. Earnings measure the wealth of the firms but not the health of the shareholders.

Keywords: Retained Earnings, Shareholder Enrichment, Financial Performance Metrics, Assets Growth, Pecking Order Theory