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The Secret to Business Success? Profitability, Not Investors

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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."

Business News Daily Editor

Business News Daily was founded in 2010 as a resource for small business owners at all stages of their entrepreneurial journey. Our site is focused exclusively on giving small business advice, tutorials and insider insights. Business News Daily is owned by Business.com.