If you’re a small business owner who's been turned down for a small business loan or is just feeling a little strapped for cash lately, take heart. Outside investments in your company are not predictors of long-term success.
A loan (or private cash injection from a wealthy uncle) might be the only thing standing between you and bankruptcy right now — but if you can hang on a little longer, you may be better off.
That’s the conclusion of new research that finds that CEOs are wrongly rewarded when companies grow due to investments – even though that practice has been found to hurt long-term shareholder value – rather than only rewarding growth due to overall improved profitability of the business.
Growth due to investments sends CEOs a message to expand at all costs, while hurting chances for companies to further improve their shareholder value, said the study's author, Partha Mohanram, a professor at the University of Toronto's Rotman School of Management.
"Most people don't look long-term," said Mohanram. "We're not alleging these guys are doing this on purpose – far from it. We just think this is a fallacy many people fall for."
The paper confirmed past research showing the best kind of growth for improved shareholder value comes from increased profitability, while investment-related growth destroys value.
"It's good to grow," said Mohanram. "But you have to grow in a way that adds value for shareholders."