A literature reappraisal is a specific type of research paper that focuses on published literature on the given subject. It is more than a mere sum-up of the literature, nevertheless, as it presents analysis, forms, and reviews of single beginnings, groups of beginnings, and the organic structure of literature as a whole. In this chapter the reappraisal of literature has been made which is divided into three subdivisions. Conceptual Reappraisal: synthesizes countries of conceptual cognition that contribute to a better apprehension of the issues. Empirical reappraisal is the literatures, or old surveies that relate or argue positively with your surveies hypothesis and variables. Contextual reappraisal shows the surveies which has been done antecedently on the peculiar subject.
2.1 Conceptual Review
2.1.1: Economic Value Added – A General Perspective
Asish K Bhattacharyya & A ; B.V.Phani ( 2001 ) in their paper examine whether EVA is a higher public presentation step both for corporate coverage and for domestic administration. It completed that though EVA does non offer extra information to investors, it can be modified as a corporate point of view for animating and educating employees to separate between value making and value destructing actions. This would steer to direct all attempts in making stockholder worth. The paper highlights the consciousness of the unsafe motion of describing EVA casually that might lead on investors.
Economic Value Added – the construct
The constructs of EVA and ‘residual income ‘ are based on the theory that a house creates wealth on behalf of its proprietors merely if it generates excess over the cost of the entire invested capital. EVA is nil other than the residuary income after factoring the cost of capital into net operating net income after revenue enhancement. This paper examines EVA both as to appraisal of overall public presentation and direction beliefs that helps to come on the productiveness of resources.
EVA= ( adjusted NOPAT – cost of capital ) x capital employed — — — – ( I )
EVA = ( Rate of return – cost of capital ) x capital — — — — – ( II )
Rate of Return = NOPAT/Capital
Capital = entire assets minus non-interest bearing debt, at the beginning of the twelvemonth
Cost of capital = cost of equity x proportion of equity + cost of debt ( 1-tax rate ) x proportion of debt in the capital.
The above cost of capital is nil but the leaden mean cost of capital ( WACC )
Cost of equity is usually estimated utilizing capital plus pricing theoretical account ( CAPM ) that estimates the expected return commensurate with the peril of the assets.
If ROI is defined as NOPAT/capital so the above equation can be rewritten as
EVA= ( ROI- WACC ) x CAPITAL EMPLOYED — — – ( III )
This paper examines the EVA construct from two positions, EVA as a public presentation step and EVA as a corporate doctrine.
EVA as a public presentation step
The writers argue that EVA is a superior step as compared to other public presentation steps on four counts:
oˆ‚? It is close to the existent hard currency flows of the concern entity ;
oˆ‚? It is easy to cipher and understand ;
oˆ‚? It has a higher correlativity to the market value of the house and
oˆ‚? Its application to employee compensation leads to the alliance of managerial involvements with those of the stockholders, therefore minimising the supposedly dysfunctional behavior of the direction.
EVA a superior public presentation step
EVA is claimed as being advanced than the normal steps such as ROI, ROE and ROA, which are based on the accounting informations. With regard to capital invested in the house, these steps provide the rate of return earned by the house. The chief restraint of these steps is derived from restrictions built-in in the measuring of accounting net income. EVA claims that because of these imperfectnesss, the accounting based methods are non good placeholders for value devising. Whether EVA is an betterment over consecutive steps and serves the intent of appealing the directors to pay idea to stockholders value even if that consequences in compromising present public presentation. The reply may be negative because all the above restrictions are besides related with EVA.
EVA as a Corporate Doctrine
EVA may non hold superior informational value to capital markets ; it can be really practical in retrieving the productiveness of a house, if adapted as a corporate doctrine. EVA, as a corporate doctrine, entails utilizing of EVA at each determination degree in the organisation. In fact EVA should be personalized as a civilization inside the organisation instead than as a strategy. EVA when used as a corporate doctrine does non necessitate accurate sentiment, hence hurdlings in ciphering EVA does non come in the manner of constructing the EVA traditions in an organisation. A house can by and large gauge its WACC a job rate that is being used by houses in capital budgeting determinations. As a consequence it is non difficult for employees to utilize EVA for determination doing numbering operational determinations. The benefit of EVA over other similar tools is that it improves concern literacy because of easy comprehend accomplishment and theoretical lucidity. The one factor that sets it apart over usual steps is its contemplation of the cost of capital and this is the one portion, which have to be recognized by everyone occupied in operations.
2.1.2: Economic Value Added ( EVA ) – Relevant Issues
Dr. Anil K. Sharma and Satish Kumar ( 2010 ) in their paper emphasize the construct of EVA have gained considerable notice in the advanced economic systems, but execution issues and its soundness is under argument all over the universe. The paper presents a wide literature reappraisal and a important analysis to travel to the progresss in EVA. The EVA of the company is merely a step of the incremental return that the plus earns over the market rate of return. In simple footings, it can be known that EVA calculates the profitableness cyberspace of cost of capital. EVA can be occupied as the net operating net income subtraction suited charge for the chance cost of all the capital invested in a undertaking. EVA is an appraisal of true economic net income or the sum by which net incomes go beyond or fall short of the minimal rate of return that investor and loaners could acquire by puting in other securities of similar hazard.
Relationship between Economic Value and Stock Returns.
The protagonists of EVA argue that EVA is extremely correlated with stock returns. Stock monetary values can be derived superior than other accounting based public presentation indexs through EVA. EVA is better correlated with stock returns as compared to traditional public presentation steps. Machuga et Al. ( 2002 ) in their survey highlighted that EVA can be used to come on future net incomes anticipations. They besides found that EVA and RI ( Residual Income ) variables are extremely correlated and likewise in footings of relationship with stock returns. Some research workers province that EVA performs relatively hapless in association with other steps like net incomes in explicating the stock returns. The important grounds are estimation mistakes in ciphering capital charge ( WACC ) and accounting accommodations as compared to what market is utilizing to value houses.
EVA acceptance and house value
The Firms which adopt EVA will hold above mean profitableness compared to their equals. Extra groundss excessively province those EVA adoptive parents earn increased profitableness comparative to their equal after execution of EVA. The houses utilizing EVA demo a superior proportion of institutional rights and a lower per centum of insider rights than non-adopters. An of import survey that addresses the alterations made by EVA adoptive parents is by Wallace ( 1997 ) . It examines the ensuing public presentation of houses utilizing EVA and other residuary income methods. The writer finds that EVA adoptive parents dispose of more assets and fewer new investings. Stockholders get what they pay for ; i.e. public presentation is greater in the countries that are immune by the EVA fillip program.
Relationship between EVA and Market Value Added ( MVA )
They examined the connexion between EVA and MVA of companies and found a stronger correlativity between EVA and MVA. They established that MVA and NOPAT were positive or normal but the mean EVA over the period was negative.
EVA and Managerial Performance
In this position EVA is measured as better pick to the traditional public presentation method such as Net incomes, EPS, and ROE etc. EVA based public presentation thrust directors to use house ‘s assets more efficaciously and it helps in decrease of differences in the involvements of the directors and stockholders. The houses that take on residuary income based inducements programs show increased income. EVA and residuary income could demo utile in actuating directors for stockholder wealth formation but whether executing of EVA and residuary income based inducements have been genuinely utile remain an unfastened inquiry for future research. An efficient EVA wages system requires a considerable commuting effort and extended counsel for both directors and their subsidiaries.
2.1.3: ECONOMIC VALUE ADDED PERFORMANCE INDICATORS FOR COMPARISON WITH THE TRADITIONAL.
In this article the writer tried to explicate the importance of EVA and its relationship with other traditional public presentation indexs of an administration. EVA is compared with the traditional public presentation rating methods.
Stock Market ActA
Stock market jurisprudence can inform directors how to look at the market is the company ‘s direction and value creative activity capableness to the director critical out over a longer period of clip their value formation potency of the company transferred to the investor ‘s achievement.A
Return onA investing
Return rate of investing decision-making footing, any investing program return on investing is less than the leaden cost of capital, in malice of the angle from the section directors, or from the company point of position, they should give up the investing at this clip, section directors mark and concern aims and frailty versa.
Tax return on equity
Tax return on equity reflects the return on stockholder investing financess for the after-tax net income and equity capital ratio.A The return on equity as a direction index, directors may be replaced merely because with the debt equity capital, alterations in the company’sA capital structureA and acquire high fillips, directors and therefore may accept debt funding plan, and give up those who have to utilize equity funding of Item.A
Net incomes per portion
Net incomes per portion are the portion of a venture during a certain public presentation ( with after-tax net net income divided by the figure of ordinary portions outstanding ) . After-tax net incomes per portion non merely by the size of the impact of the public presentation, but besides by the impact of differences inA capital construction, while theA capital structureA of the company ‘s central office regulation, at the sectoral degree is the director of non-controllable factors, is non contributing to the public presentation of sector directors assessment.A
Cash flow rating methodA
The chief indexs of hard currency flow appraisal method, including free hard currency flow, net nowadays value and investing return on hard currency flow, these indexs in the venture the ability to bring forth hard currency flow to helpA concern managersA acknowledge the concern of capital efficiency.
Evaluation the pick of indicatorsA
Enterprises must prefer an appropriate rating method. It should be based on house characteristics or rating of the aims to be achieved to do the concluding pick. If an endeavor merely wants to come on balance sheet effectivity, control ofA workingA capital, increased turnover, developA histories receivableA direction, and so the basic rating methods, such as return on assets, or EVA are good plenty, since all of these indexs are net incomes and assets sheet related. If the depreciation of the assets of endeavors should take out more, so the hard currency flow rate of return is the best attack, because it is calculated to be definite and adjusted depreciation of the asset.A
A A A A Those cost nest eggs have been completed, the undertaking endeavor restructuring, the current would wish to emphasize growing, and those who merely want entree to farther growing chances for concerns, should dump the rate of return methods, such as return on investing, return on equity, hard currency flow, return and so on, because these indexs for measuring the benefits of growing did non, it will let directors tend to prefer non to increase the capital use was able to make gross growing in investing plans. Such endeavors should utilize EVA evaluation.A
A A A A It should be noted that the intent of public presentation rating is to maximise stockholder wealth, if the rating is complex and hard to value, for the purpose of accomplishing that any rating of effectivity of the method will be weakened.A
2.1.4: Economic Value Added: The Invisible Hand at Work
Durant, Michael ( 2000 ) in his article “ Economic Value Added: The Invisible Hand at Work ” has explained that EVA is both a step of value and besides a step of public presentation. The value of a concern depends on investor ‘s outlooks about the future net incomes of the endeavor. Stock monetary values track EVA far more closely than they track net incomes per portion or return on equity. A sustained addition in EVA will convey an addition in the market value of the company. As a public presentation step, Economic Value Added forces the organisation to do the creative activity of stockholder value the figure one precedence. Under the EVA attack stiff charges are incurred for the usage of capital. EVA focused companies concentrate on bettering the net hard currency return on invested capital. EVA is altering the manner directors run their concerns and the manner Wall Street monetary values them. When concern determinations are aligned with the involvement of the stockholders, it is merely a affair of clip before these attempts are reflected in a higher stock monetary value.
2.1.5: EVA: The Right Measure of Managerial Performance
Reddy Irala, Lokanandha ( 2005 ) had conducted a research survey entitled as “ EVA: The Right Measure of Managerial Performance? ” Harmonizing to this survey it is really indispensable to aline the involvements of the troughs and stockholders or at least cut down the difference in involvements. In this respect Economic Value Added has been seen as better option to the traditional public presentation measures-Profits, EPS, ROCE and ROE etc. While successful EVA narratives in the West are rather encouraging, empirical research is non sufficient to set up the claim of EVA as a better step. However there is besides non much research to turn out it otherwise. In instance of India either manner research is really unequal. Although non a Panacea, EVA based compensation programs will drive directors employ a house ‘s assets more fruitfully and EVA should assist cut down the difference in the involvements of the directors and stockholders, if non absolutely aline them.
2.1.6: The Development of Corporate Performance Measures: Benchmarks before EVA
Goetzmann, N. William and Garstka, J. Stanley ( 2005 ) had conducted a research survey entitled, “ The Development of Corporate Performance Measures: Benchmarks before EVA ” . The survey reveals that EVA can be viewed as a modern effort to use constructs that have been developed through the class of the twentieth century by economic experts and directors. Is simpleness is both its attractive force and its restriction. While it reasonably reflects the basic construct of single-period residuary income, it does non turn to the inter-temporal nature of the rating job. Without proper accommodations, EVA may even short-change future growing chances.
2.1.7: An Analysis of EVA and Other Measures of Firm Performance Based on Residual Income
Martin, D. John, Petty, J. William, and Rich, P. Steven ( 2003 ) in their research survey entitled, “ An Analysis of EVA and Other Measures of Firm Performance Based on Residual Income ” reviews the theoretical foundations of residuary income as a tool for measuring a house ‘s interim public presentation for intents of delegating incentive compensation. Consequently, paying for public presentation utilizing residuary income to mensurate wealth creative activity can hold incentive effects that are inconsistent with wealth creative activity. The paper explains that recent efforts to turn to the defects of residuary income can efficaciously turn to the wealth measurement issue ; nevertheless, they give rise to serious execution jobs related to the necessity for calculating future steadfast public presentation. Furthermore, if internal prognosiss of future house public presentation are used, this is a beginning of a potentially serious moral jeopardy job as the same directors whose public presentation is being evaluated provide the prognosiss.
2.2: Empirical Reappraisal
A 2.2.1: Evaluation through EVA and Traditional Measures an Empirical Survey
Dr. N R V Ramana Reddy, M.Rajesh, Dr.T.Narayana Reddy ( 2011 ) the writers of this paper describe and compare the EVA with other steps like Return on Equity ( ROE ) , Return on Net worth ( RONW ) , Return on Capital Employed ( ROCE ) and Earnings per Share ( EPS ) . Apart from this, taking the existent fiscal informations of a company, the paper shows how EVA computations can be done to show whether the company is adding to stockholder value by bring forthing net incomes over and above the capital charge.
Table 2.1: Comparison of different Traditional Performance Measures
employed ( CE )
From the above tabular array 2.1, it is clear that traditional step of corporate public presentation does non see cost of capital in computation of NOPAT whereas EVA includes the same.
Study tried to happen out the following aims:
1 ) To cipher the EVA and Traditional Performance steps like ROCE, EPS, and RONW of Hindustan Unilever Limited.
2 ) To compare EVA with the Traditional methods for measuring a company ‘s Financial Performance.
The secondary information has been collected from published one-year studies of HINDUSTAN UNILEVER LIMITED
Tools of Analysis:
EVA = NOPAT – COCE
NOPAT = Net runing net incomes after revenue enhancement
COCE= W1.Kd + W2. Ke+ W3.Kr
W1, W2, W.3 = Weights assigned to single beginnings in the capital construction
Kd = I ( 1-t )
Kd= Cost of Debt
I = Interest rate
T = revenue enhancement rate
Ke= Dividend + g
Ke= Cost of Equity
Po= Price of portion
G = growing in a portion
g = Ke X Retention Ratio ( B )
b= Net incomes per Share – Dividend Per Share
Net incomes per Share
Table2.2: EVA VS ROCE AND EVA VS RONW AND EVA VS EPS
( % )
( % )
EVA as a %
a % of
EVA as a % of
No. of portions
ROCE was observed to be 61.8 % i.e. , for every Rs 100 investing the return is Rs 61.8, whereas EVA as a per centum of Capital Employed is merely 30.43 i.e. , or every Rs 100 investing, the company has added value of Rs 30.43.On an norm, the Return on Capital Employed during the survey period is 62.4 % whereas mean EVA as a % of Capital Employed is 33.25 % . The appraisal shows that difference exists between the public presentation consequences given by traditional methods and EVA. The traditional methods do non uncover the existent value add-on to stockholder ‘s wealth.
Table 2.3: Coefficient of Correlation of different public presentation steps with SVA
In this survey EVA is the step that correlates the best by far with stockholder wealth creative activity and it would be just to presume that a company that can invariably better its EVA should be able to better its stockholder value. It is besides recognized that the relatively weak correlativity that was bing between SVA ( Shareholder Value Added ) and ROCE, RONW every bit good as EPS. The survey concluded that growing in net incomes is non equal to bring forth value, except returns are higher than the cost of capital. From the survey, it is obviously observed that EVA, when compared with traditional steps, it gives accurate figures how much really the stockholder is traveling to acquire at the terminal of the accounting twelvemonth by taking into history cost of capital like cost of equity, cost of debt, and cost of maintained net incomes. The survey concludes that EVA is the best fitting step for mensurating the value of stockholders.
2.2.2: EVA or Traditional Accounting Measures ; Empirical Evidence from Iran
Mehdi ArabSalehi and Iman Mahmoodi ( 2011 ) in their survey tried to happen out the high quality of EVA as a public presentation step compared to traditional accounting steps. The survey is done with 76 companies listed in Tehran Stock Exchange from 2001 to 2008. Here both comparative and incremental information content attacks are employed.
Here stock return is taken as the dependent variable and the independent variables are EPS, ROA, ROE and EVA. EPS is measured by spliting net income by the mean figure of common portions outstanding. ROA is measured by spliting net income plus involvement disbursals by mean entire assets. ROE is measured by spliting net income by mean equity.
EVA = NOPAT – ( WACC A- CAPITAL t -1 )
Adjusted NOPAT and invested capital are determined by:
NOPAT T = EBIT t -Tax+ Adjustments t
Invested Capital = equity + all interest-bearing short and long term liabilities + Adjustments
The cost of capital is defined as follows:
D is the book value of debts, E is the market value of equity, Kd is the return on debt, T is the rate of revenue enhancement and Ke is the expected return of stockholders. The capital assets pricing theoretical account ( CAPM ) is used to gauge the cost of equity ( Ke ) . The one-year systematic hazard ( Beta ) for each house is estimated utilizing 36-monthly returns of each stock ( Ri ) and returns of market ( Rm ) . In add-on, the three-month rate of authorities bonds, which is acquired straight from the web site of Central Bank of Iran, is considered as the hazard free involvement rate ( Rf ) . However, the cost of equity is calculated as follows:
In this survey, to analyze the high quality of EVA to traditional steps, a pooling panel informations method is used. Relative and incremental information content trials of EVA and three traditional accounting steps ( including EPS, ROE and ROA ) utilizing the undermentioned arrested developments:
Where ; Rit is stock return of house I in twelvemonth T, MVit-1 is market value of house I in twelvemonth T a?’1, and I± are the coefficients of arrested developments and it Iµit is the error term.
The survey shows the descriptive statistics of all variables. Mean statistics shows that all variables have a positive mean and besides ROE ( 0.6033 ) has the largest and EPS ( 5.23E- 09 ) has the lowest mean among the variables. Furthermore, the mean of ROE ( 0.6033 ) is greater than that of ROA ( 0.2175 ) which shows Persian houses use a batch of debts in their capital construction.
Relative information content trials
Table 2.4: Trial consequences of comparative information content of EPS, ROE, ROA and EVA
As shown arrested development theoretical accounts ( 1 ) , ( 2 ) and ( 3 ) are important at 1-percent degree, while arrested development ( 4 ) is non statistically considerable. The consequences indicate that stock returns are more affiliated with ROA ( R2 =14.06 per centum ) than other public presentation steps, peculiarly EVA. The comparative information content tests show that traditional accounting steps offer more information than EVA.
Incremental information content trials
Table 2.5: Trial consequences of Incremental information content trials
The survey shows F-test and Hausman trials are engaged to take the most suited pooling methods. The consequences of F-tests show that pooled theoretical accounts are suited than fixed and random effects theoretical accounts for all of arrested developments ( 5 to 7 ) . All arrested development theoretical accounts ( 5 to 7 ) are of import at 1 per centum degree. The highest R2 ( 16.04 per centum ) is reported in arrested development ( 7 ) , which combines ROA and EVA. EVA adds merely a small information content farther than EPS, ROE and ROA.
The comparative information content trials shown that ROA has the highest explanatory control in explicating stock returns. EVA does non hold important association between stock return. As per the survey in Persian capital market traditional accounting steps are more associated with stock returns than EVA. As per incremental information content trials EVA adds merely marginally to information content beyond EPS, ROE and ROA. The consequences show that traditional accounting steps, peculiarly ROA, do better than EVA.
2.2.3: A Recent Analysis With Respect To EVA and Share Price Behaviour Of Indian Banks
Sivakumaran. D and Saravanakumar. M ( 2011 ) conducted a survey among the Indian Bankss to look into the relationship between EVA and portion monetary value behavior. In the survey EVA is calculated and compared with the peculiar portion monetary values of 39 Bankss of the BSE-BANKEX for a period of seven old ages get downing from FY 2004-05 to FY 2010-11. The survey is conducted to happen out the relationship between Economic Value added and other fiscal variables like
Tax return on Assetss, Return on Owned Funds and Earnings per Share and besides to analyze the relationship between portion monetary value and other fiscal variables like EVA, ROA,
ROF and EPS.
In the paper Pearson ‘s Coefficient of Correlation is used to happen the connexion between the EVA and other traditional steps. To demo the relationship of EVA, EPS, ROA and ROF with portion monetary value Regression analysis has been used. The motion of growing of value add-on in footings of EVA in the Indian Banking Industry, the survey used statistical tools like mean, standard divergence, CV, LGR ( Linear Growth Rate ) and’t ‘ statistic for analysing the fiscal information of the sample Bankss.
As per the survey Investing in the market is going more and more hazardous as the beta of the single securities is lifting twelvemonth by twelvemonth. The rise in beta is increasing leaden mean cost of capital ; it specifies that capital is going more and pricier. The Bankss portion monetary values have showed a lifting tendency as the market is going more and more hazardous, investor ‘s mentality are increasing for more or less all the old ages. In the survey portion monetary values of two Bankss shows high correlativity of coefficient and coefficient of finding and the portion monetary values of 18 bank ‘s shows low correlativity of coefficient and coefficient of finding with EVA. This shows that there is no relation between EVA and portion monetary value.
This survey explains the significance of utilizing EVA as a agency for mensurating fiscal public presentation. It shows that there is no well-built lineation of EVA of selected Bankss all through the period. Due to higher cost of capital the wealth earned by most of the Bankss in the twelvemonth 2006 is negative. The thought of EVA is deducting the cost of capital from the house ‘s net incomes to measure, the economic extra value produced by the house to its proprietors over the cost of capital employed and the cost of debt has small consequence on the EVA. On the other manus, as expected EVA behaves in a additive manner with regard to the cost of equity. It is found that there is no strong relation between EVA and market monetary values of the Bankss. Therefore, the investors do non give so much weight to EVA for its investing determination. It is besides expected that the pattern of EVA as a fiscal public presentation tool will besides be more in India. Harmonizing to the survey EVA is the 1 of the steps, which can be used to calculate the public presentation of the Bankss but it can non be used to foretell the portion monetary value of the company.
2.2.4: The Relationship between Stock Return and Economic Value Added ( EVA ) : A Review of KSE-100 Index
Muhammad Asad Khan, Naveed Hussain Shah, Atta ur Rehman ( 2011 ) conducted the research in order to uncover the connexion among stock return and economic value added ( EVA ) as evaluate to the connexion with other variable such as net income ( NI ) and runing hard currency flow ( OCF ) with in Pakistani stock Market. The survey is conducted during seven old ages from 2004 to 2010 for 60 houses. The survey is conducted on non-financial houses registered on Karachi Stock Exchange.
The figures contain clip series every bit good as cross-sectional informations, so pooled arrested development theoretical account is utilize for the association. The general signifier of the theoretical account is
“ Yit ” is the stock return, “ I?0 ” is the intercept, “ Xit ” are the independent variables where “ eit ” is the error term.
The Objectives of this research are
1. Supplying independent empirical cogent evidence on the information content of EVA, Net income, and accounting net incomes steps.
2. Increasing involvement in EVA in the concern imperativeness, increasing usage of EVA by houses and among faculty members, and possible involvement in EVA among accounting policy shapers.
3. Introducing grounds about the information content of economic value added from the Pakistani market.
The survey shows that finally the EVA is non demoing a greater engagement in foretelling stock returns as clear from the lower value of its coefficient -53.83 as against to 96.2388 and 51.0941 coefficients of the hard currency flow from operating activities and net income severally.
In the survey variables are of import as clear from the lower p-values but the R-square value shows the superior descriptive power of the hard currency flow from runing actions. Pearson correlativity with the variables calculate that all of the variable are positively correlated excepting EVA which is negatively correlated and among net income it does non demo any of import relationship so it means none of resonance is found among net income and EVA. The negative correlativity between Stock return and EVA is besides foretelling the dependence on each other.
From the survey it is found that EVA is non lending to the stock return as the investor dependance and trust is on the status of dividends to the stockholder instead than increasing value of the concern. Higher the payment of dividend will finally add to stock return as investor are valuing it more as clear from the OCF importance and coefficient. Higher OCF means higher hard currency creative activity manque from operation therefore finally foretelling greater prospective of payout ratio as a consequence taking to lifting stock return comparatively better than the net income visual perception that it make add up the noncash history receivable which is incapable to provide in the signifier of dividends.
In the survey it is found that EVA excessively possesses assorted qualitative facets such as the public presentation of the top direction and board of governors and their consciousness about the EVA and the mentality of investors to this theoretical account which were non taken due to complexness in mensurating these variables.
2.2.5: EVA versus Conventional Performance Measures – Empirical Evidence from India.
The chief intent of the survey by A.K. Sharma and Satish Kumar ( 2011 ) is to look into whether Economic Value Added ( EVA ) can be used as a tool of public presentation steps though puting in Indian market and present cogent evidence about its advantage as a fiscal public presentation step as compared to traditional public presentation steps in Indian companies. To achieve this, public presentation of the Indian listed fabrication companies is compared with traditional fiscal public presentation methods used in investing analysis. To prove the hypotheses and to cognize the efficiency of different public presentation steps Panel information arrested development was used. As per the Regression consequences about hypothesis 1 show that EVA is considerable association with MVA of the companies and there is positive connexion between EVA and MVA of companies. Another scrutiny from the consequences is that as EVA outperforms NOPAT, it can be used as replacement for market return ( MVA ) . Merely a small per centum of alterations in MVA can be explained by EVA and NOPAT as calculated by adjusted r- square of EVA and NOPAT severally. In order to do out whether EVA dominates traditional public presentation steps such as NOPAT, ROCE, ROE, and EPS etc Hypothesis 2 was tested. The consequences show that EPS and RI lead than EVA in explicating the MVA. Pair wise combinations that most clear up MVA, in order of diminishing power, are EPS/NOPAT ( 26.54 % ) , EPS/RI ( 25.98 % ) , and EVA/EPS ( 29.89 % ) . when combined with EPS, EVA is graded 3rd best step, therefore reasoning that even though EPS is top steps of stockholder rating nevertheless EVA besides can be used by investors doing investing determination and in steadfast appraisal. Another decision from these consequences is that investor in India chiefly focus on conventional steps while doing investing determination and in appraisal of companies. Incremental value relevancy trial besides hold the same consequences, reflecting the high quality of traditional steps. The consequences sing the value relevancy of constituents of EVA along with traditional public presentation steps shows that EPS dominates, but constituents of EVA besides add to the fluctuations in stockholder value. Therefore from the assorted groundss from the survey conclude that investor have to utilize EVA while be aftering investing scheme.
2.2.6: The Relationship between Economic Value Added ( EVA ) and Market Value Added ( MVA ) With Reported Earning: An Empirical Research of 40 Listed Companies in Indonesia Stock Exchange for the Year 2004-2007
Pratiwi Putri Wibowo and Ruben Garcia Berasategui ( 2008 ) conducted the survey to analyze the relationship between Economic Value Added ( EVA ) and Market Value Added ( MVA ) with the reported net incomes. The intent of the survey was to derive better apprehension in the usage of EVA and MVA in relation to the reported net incomes in certain intents from different arrested development theoretical accounts.
Data and Research Methodology
The writers developed a figure of hypotheses to be tested statistically and will do clear and describe the consequences. Thus it is descriptive and illative ( hypothesis testing ) . The nature of survey is co relational survey since the research worker is dying with specifying the relationship of the variables with the job statement. The figures used in the survey are secondary informations, which are from 2003- 2007 fiscal studies of the listed companies from the database and cyberspace and was put together by the writer. The sample size is 40 listed companies and the writer uses a purposive sampling design.
The survey shows that Indonesian listed companies have negative norm of EVA in 4 old ages of the research range ( twelvemonth 2004 to 2007 ) . It shows that usually, Indonesian listed companies still have non generated value-added from its operations.
The maximal correlativity among EVA and Reported Earnings is achieved in theoretical account a, which correlates EVA and Reported Net incomes. The arrested development analysis states that 30.90 % of incompatibility in Reported Net incomes can be explained by EVA in the same twelvemonth. The consequence is moderately clear since EVA is calculated from fiscal information of the company after the year-end.
The maximal correlativity among MVA and Reported Earnings is achieved in theoretical account a, which correlates MVA and Reported Net incomes. The arrested development analysis states that 80.60 % of incompatibility in Reported Net incomes can be explained by MVA in the same twelvemonth. The consequence shows that the Reported Earnings is excessively affected from the value that companies have created from the market point of position in the same twelvemonth.
In the multiple arrested developments, the theoretical account that shows highest correlativity ; which correlates EVA, MVA and Reported Net incomes in the same twelvemonth. It shows that even though 80.60 % of incompatibility in Reported Net incomes can be explained by EVA and MVA in the same twelvemonth, MVA is more of import in explicating Reported Net incomes than EVA. As a consequence, there is still non equal cogent evidence that EVA can be used every bit expeditiously as MVA in measuring the Reported Net incomes.
Based on the consequences, this survey has proved that there are connexions among EVA and MVA with Reported Net incomes, peculiarly when it is used in rating intents. Whereas it can besides be used for other intents, the connexions are non every bit high as in the rating purpose theoretical account chiefly in the growing anticipation theoretical account. Therefore, the writer does non rede the growing anticipation theoretical account to be used because it may make bias consequences.
2.2.7: Cogency of the Economic Value Added Approach: An Empirical Application
Christos Anastassis and Dimitris Kyriazis ( 2007 ) had conducted a research survey entitled “ Validity of the Economic Value Added Approach: An Empirical Application ” . The aim of the survey was to look into the comparative explanatory power of Economic Value Added ( EVA ) theoretical account with regard to stock returns and houses ‘ market value, compared to set up accounting variables ( e.g. net income, runing income ) , in the context of a little European developing market, viz. the Athens Stock Exchange. The survey revealed that net income and runing income appeared to be more value relevant than EVA. EVA does non look to hold a stronger correlativity with houses MVA than other variables.
2.2.8: MVA and EVA: Some empirical grounds
Dr. D.V. Ramana ( 2007 ) had conducted a research survey entitled “ MVA and EVA: Some empirical grounds ” . The survey through empirical observation examines the relationship between MVA and EVA of the Indian companies. Though the focal point of the paper is the relationship between EVA and MVA, it besides tries to understand the relationship between MVA and other common accounting Numberss like NOPAT, PAT and PBIT. The survey revealed that there is no strong grounds to back up the claim that EVA is superior to the traditional public presentation step in its association with MVA.
2.2.9: Value-based direction, EVA and stock monetary value public presentation in Canada
Athanassakos, George ( 2007 ) had conducted a research survey entitled “ Value-based direction, EVA and stock monetary value public presentation in Canada ” . The intent of this paper is to find the extent to which Canadian companies have embraced value-based direction ( VBM ) methods and measure the stock monetary value public presentation of the companies that use VMB vs. those that do non. The survey finds that value-based direction methods are widely used in Canada, with the likeliness of use being higher for larger companies with younger and more educated executives with an accounting/finance background. The statistical analysis that follows the tabular matter of study consequences indicates companies that used EVA had a better stock monetary value public presentation than those non utilizing EVA. Furthermore, our logit arrested development analysis shows that companies with better stock market public presentation exhibited higher likeliness of utilizing EVA.
2.2.10: Is economic value added more associated with stock return than accounting net incomes? The UK grounds
Ismail, Ahmad ( 2006 ) had conducted a research survey entitled “ Is economic value added more associated with stock return than accounting net incomes? : The UK grounds ” The paper seeks to analyze the claim of EVA advocators of its high quality as a fiscal metric compared with other steps. The paper uses a sample of 2,252 firm-year observations from the UK market and applies panel informations arrested developments to prove the comparative information content of EVA and other accounting steps and the incremental information content of EVA constituents in explicating stock return. It is found that net operating net income after revenue enhancement and net income outperform EVA and residuary income in explicating stock return ; it was besides found that accumulations and runing hard currency flow have important incremental information content, while the accounting accommodations of EVA advocates have significantly less part in explicating stock return. Yet the paper concludes that other variables must be considered in order to capture the unexplained fluctuation in stock return theoretical accounts.
2.2.11: Economic Value Added Application to Portuguese Public Companies
Peixoto, Susana ( 2006 ) had conducted a research survey entitled as “ Economic Value Added Application to Portuguese Public Companies ” . Based on a study of Portuguese public companies listed on the Lisbon Stock Exchange, research was carried out on the consciousness and the use of assorted public presentation steps. The consequences indicate that directors elect public presentation steps based on net income. Yet more sophisticated steps such as EVA or CFROI are being progressively adopted. The major part of this survey is the analysis of the information content sing Operating Income, Net Income and EVA, based on a sample of 39 Lusitanian public companies during the period from 1995 to 1998. The chief consequences suggest that EVA does non hold more information content than traditional public presentation steps in explicating Equity Market Value. The relationship between EVA and Market Value Added ( MVA ) , nevertheless, is statistically important.
2.2.12: A Fresh expression at Economic Value added: Empirical survey of the Fortune Five Hundred Companies
Abdeen, M. Adnan and Haight, G. Timonty ( 2002 ) had conducted a research survey entitled as “ A Fresh expression at Economic Value added: Empirical survey of the Fortune Five Hundred Companies ” . The research focuses on the utilizations, benefits and restrictions of economic value added as a value creative activity step. The survey compares the public presentation of EVA user companies with non-user lucks 500 companies for the old ages 1997 and 1998. It shows that users public presentation means net incomes as per centum of grosss, assets, and shareholders ‘ equity were higher than the non-users. However, the agencies for 1998 net incomes per portion ( EPS ) , EPS alteration from 1997 and EPS growing for the old ages 1988-1998 were lower for the EVA user companies. EVA will go less popular in its usage as an instrument of control and public presentation rating. The decision of this research is non in support of EVA usage as a step of value creative activity to shareholders.
2.3: Contextual Review
2.3.1: EVA Based Performance Measurement: A Case Study of DABUR INDIA LIMITED
Debdas Rakshit ( 2006 ) in his research paper EVA based public presentation measuring: A Case survey of Dabur India Limited tried to analyze the effectivity of traditional public presentation index like ROI with new public presentation step EVA. The survey has been conducted for the clip period from 1998 – 99 to 2002 – 03.
DU – PONT MODEL
On the footing of accounting constructs fiscal public presentation of the company is measured in this model.ROI see overall public presentation of the company and considered all the activities which contribute towards ROI. In this four facets are considered in the ratio analysis such as Profitability, Leverage, Activity and Liquidity. ROI depends on chiefly two ratios such as Capital Turnover Ratio and Net Net income Ratio. The different factor that affects ROI is explained in the DU – PONT Control Chart.
Beginning: EVA Based Performance Measurement: A Case Study of DABUR INDIA LIMITED, Debdas Rakshit ( 2006 )
Economic Value Added Model
The three factors impacting EVA are
Adjusted net incomes before involvement after revenue enhancement
Weighted Average Cost of Capital
These assorted factors impacting EVA are put in chart below. The direction can easy place the factors impacting the value of the administration with the aid of this Chart.
Beginning: EVA Based Performance Measurement: A Case Study of DABUR INDIA LIMITED, Debdas Rakshit ( 2006 )
Table: 2.7 ROI versus EVA public presentation indexs of DIL
Financial Old ages
ROI ( % )
WACC ( % )
Basic EVA on Capital Employed ( % )
( Weight based on book Value )
Basic EVA on Capital Employed ( % )
( Weight based on market Value )
Disclosed EVA on Capital Employed ( % )
( Weight based on book Value )
Disclosed EVA on Capital Employed ( % )
( Weight based on market Value )
The tabular array shows the difference exists between the public presentation consequences given by traditional step and EVA. The ROI does non demo any value creative activity happens to the stockholder wealth so any efficient determination can non be taken on the footing of ROI. But EVA measurement give a clear thought about the value add-on every bit good as value devastation happens to the stockholders wealth.
As per the survey, EVA based public presentation measuring system is the base on which the administration have to take suited determinations associated to the pick of scheme, capital allotment, amalgamation & A ; acquisitions, depriving concern and end scene. Even as make up one’s minding resource allocation it becomes indispensable to value the EVA impact of such determination. Management Accountants cover the full consciousness sing the company that would make value. They will be able to direct a company in its reform mission for value creative activity.
2.3.2: Economic Value Added ( EVA ) and Sector Returns
Nuttawat Visaltanachoti, Robin Luo and Yi Yi ( 2008 ) in this survey they tried to see the advantages of EVA by comparing with its information content in explicating 90 sector returns with three traditional accounting-based public presentation steps: hard currency flow from operations ( CFO ) , net incomes ( EBIT ) , and residuary income ( RI ) .
This paper surveies the connexion between EVA and traditional accounting public presentation steps with sector returns. The survey is conducted on 90 sectors in the US over the period 2003 to 2005. The survey is conducted in order to look into the relationship between EVA and sector returns and besides to measure whether EVA is extremely related public presentation step than traditional accounting-based public presentation steps.
In the survey the writers used Relative information content trial to analyze which public presentation steps superior, explicate sector returns by comparing the information content of EVA, CFO, EBIT, and RI, severally and to look into if EVA has closer relation with market-adjusted sector returns than CFO, EBIT and RI. The consequence of the trial shows that EBIT are more extremely linked with sector returns than RI, CFO and EVA. Thus the survey proves that net incomes are higher to EVA in explicating sector returns. In the survey the writers farther divided EVA into four constituents: hard currency flows from operations ( CFO ) , runing accumulations ( Accrual ) , after revenue enhancement involvement disbursal ( ATInt ) , and capital charge ( CapChg ) , and this is done to look into which factor of EVA contributes chiefly toward the association of EVA with sector returns. This is done with the aid of incremental information content trial. As per the consequences from the trial shows that Accrual contributes mostly toward the information content of EVA, followed by CFO, CapChg and ATInt. Accrual and CFO contributes to traditional accounting-based to public presentation steps and it helps to depict sector returns further than that explained by constituents sole to EVA such as CapChg. It strengthens the consequences originating from the comparative information content trial that net incomes take over EVA in explicating sector returns.
Some of the accounts for non happening stronger value-relevance for EVA are: First, in the survey bing realizations somewhat than future flows of each public presentation step are used. Even though EVA is a good replacement for economic net incomes, realised EVA may non make better than the current realizations of other public presentation steps such as net incomes in proxying for future hard currency flows. Second, net incomes might be a superior step to depict the sector returns since it does non necessitate to be adjusted though EVA is calculated by seting net runing net incomes after revenue enhancement ( NOPAT ) and capital well.
2.3.3: The ability of EVA ( Economic Value Added ) attributes in foretelling company public presentation.
Issham Ismail ( 2011 ) conducted the survey on ability of EVA attributes in foretelling company public presentation. This survey is done by exploratory designs and correlational method, and the intent of the survey is to happen the relationship of EVA and company public presentation. In the survey panel pool informations arrested development theoretical accounts are used and the writer has used clip series and transverse subdivision analysis at the same clip. The sample of the companies includes most of the public listed companies in Bursa Malaysia, and the survey is conducted for over the period 1993 to 2002. For the period 1997 to 2002, 245 samples of Main Board companies were selected which involved 1440 observations. While for the period 1993 to 2002, 75 Main Board companies were selected this involved 750 observations.
The survey is utilizing, arrested development analysis between value Godhead and destroyer covering stock return over a period of 10 old ages that involves 750 observations, and surveies for a period of 6 old ages which involves 1468 observations, indicates that neither value Godhead nor value destroyer had a connexion with stock returns, as both theoretical accounts are statistically irrelevant. This determination is contrary to findings by Turvey et Al. ( 2000 ) .
Harmonizing to the survey arrested development between value Godhead and value destroyer with net incomes ( represent by EPS and NOPAT ) , value Godheads had a better connexion with net incomes than value destroyers. The findings show that, value Godheads are superior multipliers of net incomes than value destroyers and this survey indicates that, value Godheads have better net incomes multiplier than value destroyers ( such determination are consistent with findings from Stewart ( 1994 ) , Turvey et Al. ( 2000 ) , and Isa and Lo ( 2001 ) . It indicates that the increases of EVA value in value Creator Company tend to increase accounting net income at a higher rate than in value destroyer companies
The survey concludes that for arrested development with frequent or period peculiar coefficients, the longer period of EVA had a better connexion with the stock return than shorter period. It shows that EVA had a better association with stock return over a longer period of the survey. These decision are dependable with happening from O’Byrne ( 1997 ) but are contradicted by findings by Isa and Lo ( 2001 ) .
2.3.4: Dissecting EVA: The Value Drivers Determining the Shareholder Value of Industrial Companies.
This survey aimed to turn to the jobs of stockholder value creative activity. The survey is conducted on 20 industrial companies to cognize how is EVA is lending towards stockholder value creative activity. The analysis was conducted for 20 industrial companies for the period of 1991 to 2000. Hypothesis was done to cover with the variables of EVA and six measure wise arrested development analysis were done.
In the survey when the arrested development analysis was conducted on the sample, the entire arrested development coefficients non merely increased, but more significantly, there was a move off from the profitableness ratios to the balance sheet ratios. The survey shows that at first profitableness ( income statement ) ratios are the cardinal value drivers in dominant stockholder value creative activity. Though, as companies become constituted wealth Godheads and acquire better on their public presentation, profitableness ratios become less of import. Efficient funding of the balance sheet, efficient fixed plus and working capital direction go top precedences in driving stockholder value.
It is found from the survey that to better profitableness borders in a company, it is suggested that the subsequent activities be undertaken: increase the gross net income border by take downing the cost of gross revenues through more efficient production ; optimizing inputs and replacing inputs without impacting merchandise quality ; cut down operating disbursals by ciphering and monitoring ( cut downing ) the ratios of assorted runing costs to end product ( gross revenues ) ; achieve relevant economic systems of graduated table for each of the value activities ; present mechanisms to better the rate of acquisition and extinguish operating expenses that do non add value to the merchandise.
Harmonizing to the consequences of this survey, balance sheet ratios or variables become progressively important as a company becomes an established value Godhead. Therefore, the efficient direction of both working and fixed capital investing contribute towards more overall efficiency in operations and improved stockholder value. The subsequent actions are recommended by the survey for working capital investing: minimise hard currency balances ; manage accounts receivable to cut down the mean figure of twenty-four hours ‘s debt outstanding ; increase stock list turnover and do maximal usage of non-interest-bearing current liabilities such as creditors and revenue enhancements.
The undermentioned actions are recommended from the survey for fixed capital investing: promote policies to increase use of fixed assets ; obtain productivity-increasing assets by agencies of prudent undertaking or investing rating techniques, such as net present value ; sell fresh or underutilized fixed assets if possible and fit degrees of use or returns on assets employed.
The survey recommends that cardinal variables which were recognized by agencies of the statistical analyses, those value drivers need to be broken down to runing degree. Value drivers depend on each company ‘s sole state of affairs and placing them can be a procedure that requires some test and mistake. Operating borders can be split up harmonizing to merchandise, geographics or consumer section. If a company is fighting to fit the accomplishments of its gross revenues force against a given client section, better consequences might be obtained if such a ratio is measured on a geographic footing.
The survey suggests that the cardinal value drivers are non inactive so they must be reviewed at regular intervals. The value drivers can besides non be considered in isolation. A monetary value addition might hold a big impact on value through an increased net income border, but non if it consequences in a considerable loss of market portion.
In most instances it is to the advantage of stockholders that direction have an incentive strategy to bring on them to follow value-based direction and actively pull off those variables that determine stockholder value. Such an incentive strategy can be based on value created as measured by the EVA of a company over a period of clip. Management can be remunerated ( or penalised ) on the footing of value created ( or destroyed ) .
2.3.5: EVA versus Traditional Accounting Measures of Performance as Drivers of Shareholders Value – A Comparative Analysis
Dumitru Andreea Paula and Dumitru Cristina Elena ( 2005 ) in their article tried to analyze the connexion between EVA and other traditional accounting steps relative to market value added ( MVA ) . The writers used informations from listed companies and the survey look into the strength of EVA has been verified first-class public presentation step to actuate direction and employees in any company due to its highest correlativity with the MVA, the theoretically best public presentation step and EVA following companies ‘ superior public presentation compared with peer non-EVA adopting companies.
The survey is based on the informations of companies listed for the period from 1994 to 2004. It revealed that EVA did non demo strongest correlativity with MVA. Though the public presentation indexs selected for the survey, the alterations in the standardised hard currency flow from operations explained the biggest per centum of alterations in standardised MVA ( 38 % ) . ROA came 2nd best ( 15 % ) and standardized EVA ( 8 % ) tierce.
When informations in the old ages when spreads were negative were left out, the consequences were merely somewhat better, with no difference in the ranking of the indexs. The consequences shows that MVA is really equal to the present value of all hereafter expected EVAs. Therefore one can expect there non needfully to be a strong correlativity between MVA and EVA on a year-on-year footing. The survey has reaffirmed the significance of hard currency flow direction. The findings suggest that some cautiousness is merited when concentrating merely on EVA as the step of pick for internal company public presentation.
Another determination of the survey was the undistinguished correlativity between MVA and EPS and DPS. The fact that both net incomes and dividends are still frequently used as the footing for portion ratings, one can deduce that, at least for locally listed companies, these rating methods are undependable in the extreme.
2.3.6: The Relationship between EVA and Stock Return
Mohammad Fawzi Shubita ( 2010 ) in his survey tried to happen out the connexion between EVA and Stock return. In the beginning of the survey he tried to explicate the significance of EVA and tried to explicate it in theoretical manner. There he states that EVA is a public presentation metric that calculates the creative activity of portion value, but it differ from the traditional fiscal public presentation prosodies such as net net income and earning from portion.
This survey aims to accomplish the undermentioned aims:
1. Supplying independent empirical grounds on the information content of EVA, residuary income, and accounting net incomes steps.
2. Increasing involvement in EVA in the concern imperativeness, increasing usage of EVA by houses and among faculty members, and possible involvement in EVA among accounting policy shapers.
3. Introducing grounds about the information content of economic value added from the Jordanian market.
Research Models and Variables
The comparative information content trial of EVA and other steps is based on analyzing the explanatory power of all the steps and proving which one the higher information content as compared to the others.
Equation – Rit= b0i+ I? 1Xit-1+ eit
The dependant variable in equation is Rit, which is a step of the annualized compounded rate of return to the shareholders2. This variable has been extensively used for analyzing the information content of net income steps ( see, for illustration, Lev, 1989 ; Easton and Harris, 1991 ) . b0i is the intercept, and eit is a random perturbation term.
The independent variables3 are as follows:
NI, net income available for stockholders ;
OCF ( runing hard currency flow ) ;
RI ( residuary income ) , calculated as Net income – ( cost of capital * entire capital ) ( Ismail, 2006 ) .
EVA ( economic value added ) .
EVA =Net Operating Net income After Taxes a?’Capital Charges
EVA =NOPAT a?’WACC* EA, ( 2 )
NOPAT = Net Operating Net income after Taxes
WACC =Weighted Average Cost of Capital
EA = Economic Asset or Invested Capital4
EVA is the difference between Net Income ( Net Net income ) and Cost of Equity. If the cost of equity is zero, the Net Net income is equal with EVA.
All industrial shareholding companies that satisfy the undermentioned conditions will be included in the survey sample:
1. Share monetary values informations are available during the survey period ( 2000-2008 ) , and there is an handiness of informations required to cipher survey variables.
2. The company did n’t come in in a consolidation procedure or allocated free portions because these events affect the company figures such as net incomes. ( 39 ) Companies will stand for the survey sample.
Table 2.8: Correlation Matrix
In the survey the stock return has the largest mean followed by NI, OCF, RI and EVA. In the correlativity matrix all the independent variables are positively correlated with one another. EVA has a lower correlativity with stock return compared to NI.EVA and RI under perform standard accounting net income step NI.
Table 2.9: Trial Conseque