Corporate value creation for Japan's construction firms in the shrinking and changing domestic market

Abstract

As Japan's bubble economy collapsed, the time when the economy was surely growing was finished. In this high economic growth period, the social system such as Keiretsu (a network of Japan's firms organized around main bank), the seniority system, and lifetime employment, had formed centering on harmony. But now this system is disappearing. In addition, the introduction of International Accounting Standards (IAS) ruthlessly discloses the real financial conditions of Japan's firms and drives the firms to adverse circumstances. The firms have to sustain these changes and compete to survive in the shrinking market. It is the time also for Japan's construction firms to change their business policy. The time when keeping a constant share always brought promised profits and the all firms coexisted in harmony has ended. The firms now have to pay attention to their profit rates and promote shareholders' interests as a top priority. At last, the firms have started to take serious approach to create their corporate value. The main purpose of this thesis is to find ways for the construction firms to create corporate value in Japan's shrinking construction market. To accomplish this purpose, the thesis studies the following three points: (1) the profit structure of Japan's construction firms, (2) the effect of introduction of IAS, especially introduction of cash flow statements, and (3) valuation methods. These three points lead the following three factors to value firms: (1) Invested capital, (2) Free cash flows, and (3) Weighted average cost of capital. The discounted cash flow model including EVA and MVA uses these three factors to value firms. Moreover, the real option method can add the value of the firms' management flexibilities. Real options are becoming crucial for corporate valuation in this uncertain market. In the end of the thesis, it verifies these valuation methods by using the financial data of Japan's construction firms in fiscal 2001. These valuation methods allow the firms to find right directions in which they should follow in order to create their value in the changing and shrinking construction market.