Four Cornerstones of Corporate Finance

The core-of-value principle states that value is created by growth and return on capital. Practical example: When considering projects, a company should carefully consider whether they match the required return on capital requirements and add to the company’s growth prospects.

The conservation-of-value principle asserts that absolute cash flows are what counts, not earnings per share. Rearranging claims on cash flows does not create value. For example: Just because a merger promises EPS growth does not mean it creates value per se.


The expectations-treadmill principle means that the more investors expect of a company’s share price, the better the firm has to perform to keep up. In practice, this has for example a significant impact on structuring executive compensation (e.g. indexed to the market performance of peer companies).

The best-owner principle states that a business’s value depends upon its owner’s capabilities. Examples are obvious, you just have to look at the value Android could have created for its previous owners vs. what it has created for Google (remember – that was an acquisition in 2005 …).