In this paper, we define and analyze shareholder value creation. To help us understand this concept better, we use the example of two listed companies, General Electric and Microsoft, between 1992 and 2003. To obtain the created shareholder value, we first define the increase of equity market value, shareholder value added, shareholder return, and required return to equity. A company creates value for shareholders when the shareholder return exceeds the required return to equity (Ke). In other words, a company creates value when it outperforms expectations. Created shareholder value is quantified as follows: Created shareholder value = Equity market value x (Shareholder return - Ke) Created shareholder value can also be calculated as follows: Created shareholder value = Shareholder value added - (Equity market value x Ke). We also calculate the created shareholder value of 400 American companies during the eleven-year period 1992-2003.
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