“A Study on Investors Perception towards EVA as Reporting Practice in Indian Banking Sector “ R. SATISH Dr. S. S. RAU Associate Professor Registrar SRR Engineering College Sathyabama University Chennai Chennai-119 ABSTRACT Economic Value Added [EVA] is a value-based framework that provides a unique insight into value creation and unites the finance theory with the competitive strategy framework.
EVA has become a popular and powerful tool for managers to measure performance and for guiding investment decisions. EVA can be computed for the organisation as a whole or according to types of products, lines of business, regions, and other factors. Traditional parameters of measurements like Return on Investment [ROI], Earnings Per Share [EPS], etc. , have failed to measure what is most important today “Value Creation “. For Several years shareholders value was measured in terms of size and not quality.
Of late, there has been a steady rise in the number of Indian Companies, which talk about the value they have created for their shareholders but a wide gap created in the banking system for EVA implementation. In this paper, an attempt has been made to know the investors perception towards EVA and to clarify the concept of EVA especially from the view point of reporting practices in the Indian Banking sector using statistical tools and appropriate suggestions were drawn. INTRODUCTION Investors are currently demanding shareholders value more strongly than ever world-wide.
The present study is an attempt to understand EVA concept in its present status and to examine reporting practices in the Indian Corporate sector along with a view of the investors towards the concept. The study also aims at knowing the investors perception towards EVA and also offering some recommendations as to how EVA should be used as a management tool. Shareholder-value maximization implies an increase of dividends and/or of share prices: the general view that managers primarily concentrate on these targets can be subject to various criticisms.
Banks are complex systems with several actors, having an own-interest, such as: • Shareholders who are interested in maximizing the value of their holdings by obtaining high dividends and/or increasing share prices. However, this might not be an entirely accurate depiction. For example, majority and minority shareholders may have different holding periods and, consequently, minority shareholders are interested in maximizing their value over the shorter term, while majority shareholders may prefer increased dividends and share prices over the longer term (even sacrificing value maximization in the short term). Board members may pursue their own goals (for example, the growth of corporate size or the number of shareholders in order to reduce shareholder power and increase their own power). • Managers may pursue their own goals (for example, risk aversion and maximizing their pay and other expenses – expense referencing), that may differ from shareholders’ and CEOs’ goals. • Customers, who covet high-quality services (such as brokerage, payment services etc. ) at low prices. Among customers, it is necessary to distinguish between: i) Funds-suppliers, such as depositors, who wish to receive high interest and good payment services. i) Funds-takers, such as borrowers, who aim to pay low interest on their loans and obtain credit facilities easily. • Suppliers, who prize steady sales. Among banks’ suppliers, the trade unions are particularly important. The unions represent the bank’s workforce (employees) and their objectives include high salaries and social security. • Government, which levies taxes and requires that all corporate activities be legal. • Supervisory authorities, who are responsible for banking sector soundness. OBJECTIVES OF THE STUDY 1.
To clarify the concept of EVA especially from the viewpoint of business unit controlling & reporting practices. 2. To examine the relevant theoretical issues and current reporting practices in Indian Banking sector. 3. To know the investors perception towards EVA 4. To offer some recommendations of how EVA should be used as a Management tool especially in Indian Banking Sector. Primary Sources: A Structured Questionnaire was developed to know about the perception of investors towards EVA especially during investment planning. Opinion of 50 individual investors of Chennai region was considered for the study.
The selection of such individual investors has been made with the help of stock broker agencies positioned at Chennai. Secondary Sources: Internet: Selection of companies was made on the basis of their brand image, reputation, status in the industry-Group etc. , and they were classified sector-wise. In the study both public and private sector banks have been considered for the analysis. QUESTIONNAIRE FINDINGS |Are you aware of the Concept of EVA? |Do you consider EVA ranking of the concerned bank while investing in a | |[pic] |stock? | |[pic] | |Where from did you come to know about the concept of EVA? | |[pic] | |Best Financial Test of Corporate Excellence Best Measures for judging Performance | |[pic][pic] | |Priority of Investors in Investment Decisions |Do you feel that in India EVA reporting practices are not very popular? | | | | |[pic] | | | | |[pic] | | |Does your company(s) report in its corporate report? Do you think that reporting of EVA should be mandatory? | | | | | |[pic] | |[pic] | | |Should there be any global standard for uniformity in reporting |Is there any correlation between market price of share and EVA? |of EVA world-wide? |[pic] | |[pic] | | |Reaction in case company not being good on EVA ground? | | |[pic] | |Predetermined idea about the investment in the security of a company in terms of | | | |PARTICULARS | |Mostly | |Sometimes | |Never | | | | | |1.
Performance of the Bank | |Y | | | | | | | |2. Profits of the Bank | | | |Y | | | | | |3.
Economic Profits of the Bank | | | | | |Y | | | |4. Managerial Strengths of the Company | | | |Y | | | | | |5.
Stock Market trends | |Y | | | | | | | |6. Expert’s Opinion | | | |Y | | | | | |7.
Market conditions | |Y | | | | | | | PROBLEM : The objective is to draw a perceptual map using an attribute-based procedure, of investors perceptions regarding two sectors (brands ) of banks. The two brands are public sector , private sector banks in India. Data was collected from 50 respondents (25 of each brand) , on five attributes , namely Experts opinion, Management of the bank , Market price per share , Economic Value Added , Profits of the bank. The Variables are measured using a 5-point rating scale, with a higher value indicating a favourable variable. MAJOR FINDINGS: This section of the report seeks to give a brief review of the main findings of the research.
These findings can be studied in two sections which are as follows: ? Reporting practices in Indian Banking sector ? Investors perception Reporting Practices in Indian Banking Sector: For analyzing the reporting practices as to EVA in Indian Banking Sector, both public and private sector banks were taken as sample. But surprisingly inspite of being high profile banks, they were not reporting EVA in their corporate reports. There are few reasons also because of which corporate bodies don’t prefer to report EVA. Some of them are traced out below • EVA concept is not much popular among Indian investors • There are various banks, which are having negative EVA.
So no one would like to report the same. • Most importantly this EVA concept has been a trademark of Stern & Stewart co. So even if one wants to use it, he will have to pay the required fee for the same to the above mentioned company. • EVA sometimes becomes very difficult to manage • For being good on EVA ground a company ought to be equally good on all the aspects of corporate efficiency. Otherwise it becomes very difficult for the concern to hold the value creation for a sustainable period of time. • Moreover, sometimes it has been observed that EVA is too harsh even in sensitive cases. For example recently it was observed that banks like SBI having negative EVA.
The reason for the same is that they have invested a huge amount of money in their long-term investments including R&D, Which is an integral part of the banking sector. It takes sometime to gain return on such investment but obviously a cost has already been incurred. After analyzing the reporting practices of EVA • There are no standards as such prescribing the reporting mechanisms • It is not mandatory under any provision of the Act. • EVA mostly changes with changes in the NOPAT & in the same direction as well. INVESTORS PERCEPTION It was found there is a lot of unawareness among investors as to the topic and huge misconception about EVA among them. RECOMMENDATIONS
For successful implementation of EVA, top management commitment, patience and perseverance to see through a complex implementation process is important. Failure of implementation is hard to define. • Yet a lot is to be done in the field of value-based performance measures. Few suggestions are given below- • There should be a proper mechanism for governing reporting of EVA. • There should be a proper format to be used for EVA reporting. • There is not yet any accounting standard for the same. • In current globalization phenomena there ought to be a common global pattern that is a benchmark to be followed. • There should be effective investor’s movement. • Accounting professionals bodies like ICAI, ICWAI should do some work for the enhancement of the awareness of the concept. Company on their own on a common ground should initiate the reporting of value-creation in their corporate reports. • There is a need of development of a framework for governing effective use and wide-spread shareholder confidence. Along with the above recommendations there should be environment of acceptance of the concept among the shareholders, employees, owners, management and other various agencies. Then only this concept can hold its ground in a sustainable manner especially in the context of Indian Environment. CONCLUSION Economic Value Added is a residual income variable. It is defined as Net operating profit after taxes subtracted with the cost of capital tied in operations.
Standard EVA corresponds mathematically the standard DCF formula because it is a modified version of DCF. EVA’s equivalence with DCF and NPV holds in valuations although DCF and NPV are based only on cash flows and EVA is based also on historical accounting items. This peculiar characteristic of EVA is due to the fact that book value is irrelevant i. e. it can be cancelled out in valuation formula of EVA. In periodical performance measurement EVA can however in some occasions give misleading information because it suffers from the same shortcomings as accounting rate of return (ROI). Inflation can distort the value of EVA. Furthermore EVA suffers from wrong periodization. In most cases the impacts of these shortcomings are however fairly small.
They can also usually be eliminated for major parts with some corrective adjustments. In spite of its faults, EVA seems to have importance for companies as a performance measurement and controlling tool. First of all it is fairly simply measure but still measures well the ultimate aim of any given company, the increase or decrease in shareholder’s wealth. Maximizing traditional performance measures like ROI is not theoretically in line with maximizing the wealth of shareholders. Therefore EVA is superior to conventional performance measures. The premise behind EVA – that businesses must cover their capital costs – is neither new nor peculiar.
Putting it into practice can still be eye-opening, EVA shows financial performance with a new pair of glasses or offers new approach especially for the companies where equity is viewed as free source of funds and performance is measured by some earnings figure. At best EVA helps with creating a mind-set throughout the organisation that encourages managers and employees to think and behave like owners. BIBLIOGRAPHY Stern, Joel M. , and John S. Shiely, with Irwin Ross. The EVA Challenge: Implementing Value-Added Change in an Organisation. John Wiley & Sons, 2001. Rappaport, Alfred. Creating Shareholder Value: A Guide for Managers and Investors. Free Press, 1997. Knight, James A.
Value Based Management: Developing a Systematic Approach to Creating Shareholder Value. McGraw-Hill, October 1997. Ehrbar, A. EVA: The Real Key to Creating Wealth. John Wiley & Sons, 1998. Copeland, Tom, Tim Koller and Jack Murrin. Valuation: Measuring and Managing the Value of Companies, Ed ed. John Wiley & Sons, 1995. Luehrman, Timothy A. “What’s It Worth? : A General Manager’s Guide to Valuation. ” Harvard Business Review, May/June 1997, pp. 132-142. Biddle, G. , Bwen, R. M. , Wallace, J. S. , 1996. Abstract of “Evidence on the relative and incremental information content of EVA, residual income, earnings and operating cash flow”. University of Washington, Seattle, WA.