What is LIVA?
LIVA stands for "long-term investor value appropriation" and provides a new measure of shareholder value creation or destruction. It represents the net present value (NPV) for the investments of all shareholders over a given period. For instance, over the period 1999-2018 Apple had a LIVA of 1,002 billion dollars (a bit over a trillion dollars). This number indicates that if an investor had bought all outstanding shares of Apple in 1999 at the market price, borrowing the money for that purchase at a cost equal to the average market return, sold all Apple shares again at the end of 2018 at the market price, and using that money as well as any intermediate cash returns (dividends and share buy backs) to repay her ‘debt’, then she would have had $1,002B left on her bank account.
Why do we need another performance metric?
The existing list of performance acronyms already seems almost endless: ROA, ROC, EBIT, EBITDA, TSR, CAR, ... . However, none of these metrics capture precisely what many executives and investors ultimately care about most: long-term shareholder value creation. For instance, return on capital (ROC) can be distorted by accounting conventions, and does not capture size or growth of profits. Total shareholder return (TSR, a measure of share price appreciation plus dividend yield) measured over a long time-period can better capture the effect of profitable growth, but can be distorted by major corporate events and does not account for the economic magnitude of the value created. Many CFOs (chief financial officers) have used NPV as a forward-looking metric to decide which projects to invest in. Now, LIVA allows calculating backward-looking NPV to decide how investments have actually performed.
How can professionals and researchers use LIVA?
Managers can use LIVA to assess their long-term firm performance compared to peers, as well as decompose LIVA over different time periods and sources (different businesses, sources and uses of cash, etc.) to assess which parts of their business have performed well at which moment. Media and public policy professionals can use LIVA to assess the performance of listed companies, groups of companies, sectors, and geographies. Management researchers can use LIVA for instance for case studies, as well as in large-N empirical research using regressions. Several examples of how LIVA can lead to new insights for professionals and researchers are available in the forthcoming paper "Introducing LIVA to measure long-term firm performance" in the Strategic Management Journal, which includes a methods manual as appendix.
Can LIVA be used to identify investment opportunities?
Because LIVA is a measure based on stock market data, historic data have very little relation to future performance at the individual company level. Companies that have done very well over the past 20 years might do again very well or they might not; these expectations are usually priced into the stock, and thus into LIVA. At the same time, LIVA can be a useful tool to identify which strategic decisions have created or destroyed value in a given industry, geography, or situation. That is the main purpose of LIVA: to have the right measure available to judge past strategic decisions so executives and investors can make better-informed strategic decisions for the future.
Which companies are included in the global LIVA database?
The global LIVA database published on this website and on WRDS (Wharton research data services) is based on monthly data from the Compustat North-America and Global Security databases with the following inclusion criteria:
- Primary issue of common stock, listed on a public stock exchange (this excludes, for instance, American depository receipts (ADRs));
- Market capitalization has reached at least $100M at some point in time over the period of analysis;
- Listing and country meet basic criteria of data integrity (this excludes, for instance, the countries Argentina, Brazil, Venezuela and Zimbabwe).
These criteria lead to a database with 500,000+ company-year observations for 45,000+ individual companies, identified by their Compustat gvkey. The database is available for researchers on WRDS and through the interactive app on this website.
How are country and industry determined?
The country represents a firm's statutory headquarter location. The industry is determined based on the 4-digit CIGS code as recorded by Compustat.
Why is the average LIVA across all companies equal to zero?
Performance of investments is usually measured relative to other investment opportunities. Because any investor can buy a globally diversified index fund, only performance above that market average is considered value creation; conversely, performance below the average is considered value destruction. LIVA thus measures how much value a company has a created or destroyed compared to the average, and the average deviation from the average is zero. Hence, the average LIVA is zero by definition. This means that LIVA cannot say anything meaningful about the performance of the global economy as a whole (for that there are other metrics, such as economic growth), but only about how companies have performed as compared to the global average.
Why can LIVA differ for the same company across sources?
LIVA for the same company even when measured over the same period can differ across sources. Differences can stem from:
- Sources of the share price data (e.g. CRSP vs. Compustat);
- Cost of equity used for comparison, such as a country index, a global index, or a constant number;
- The base year used. $100 is worth less to an investor today than 20 years ago, because she could have invested it in the stock market then and have much more money on her bank account now. Therefore it matters in which years' money LIVA is expressed. The base year in the global LIVA database used on this website and on WRDS is 2018, the last year of the data. A change of base year will change the LIVA for all companies by a constant factor.
Why does LIVA use the same cost of equity for all companies?
LIVA compares every company against the same market average performance, implicitly assuming the same cost of equity for all companies. Theoretically, each company should have its own cost of equity, because companies differ in their systematic risk. However, in a famous article Fama and French (1997) show that in practice the error margins of empirical cost of equity estimates are large compared to the estimates and their variation themselves. Thus, for most companies the cost of equity does not significantly differ from the market average. Moreover, using the market index as comparison allows for a much simpler calculation and interpretation of LIVA. If they so want, researchers can alternatively use the capital asset pricing model (CAPM) or a multi-factor model to calculate individual companies' cost of equity for their own LIVA calculations.