Purpose: The basic aim of this paper is to analyze the claim of EVA advocates about its high quality as a fiscal public presentation step compared to traditional public presentation steps in Indian companies and supply empirical groundss.
Design/Methodology: The paper uses a sample of 873 firms-year observations from the Indian market and applies pooled OLS arrested development to prove the relation and incremental information content of EVA and other gaining based steps in explicating the market value added ( MVA ) .
Findingss: The consequences about comparative information content trial reveal that NOAPT and OCF outperform EVA in explicating the market value of Indian companies. Incremental information content trial show that EVA makes a fringy part to information content beyond traditional public presentation steps such as NOPAT, OCF, EPS and RONW etc. Overall our consequences do non back up the hypothesis that EVA is superior than traditional accounting based steps in association with market value of the house.
Originality/value: Our survey concludes that other non- fiscal variables such employees, merchandise quality, community satisfaction should be considered in order to capture the unexplained fluctuation in the market value of the house.
Cardinal Wordss: Economic Value Added ( EVA ) ; Traditional public presentation steps, Market Value Added ( MVA ) , Relative information content, Incremental information content,
1. Introduction
Maximization of stockholders wealth or value is good recognized aim among corporate fiscal directors in recent old ages. Stockholders activism has reached to unprecedented degree partly because due to integrating of fiscal markets and partly because of regulative reforms ( in footings of revelation demand and investor protection ) and this has led to increased force per unit area on houses to increase stockholders value. The Corporates, which gave the lowest penchant to stockholders wonder, are now confering the extreme penchant to it ( Sharma & A ; Kumar, 2010 ) . However, despite their best attempts, many companies failed to make stockholders wealth ( Kim, 2006 ) . Modern value -based public presentation steps, such as Economic Value Added ( EVA )[ 1 ], Cash Flow Return on Investment ( CFROI )[ 2 ], Cash Value Added ( CVA )[ 3 ], Discounted Economic Profits ( EP ) , Shareholders Value Added ( SVA )[ 4 ]have been developed late by assorted confer withing companies to estimate the existent public presentation of companies and besides to switch the focal point from accounting net incomes to hard currency flows. Traditional public presentation steps such as such as NOPAT, EPS, ROI, ROE etc. have been criticized due to their inability to integrate full cost of capital. Hence, accounting income is non a consistent forecaster of house value and can non be used for mensurating corporate public presentation. On the other manus, value based steps recognise that capital invested in a corporation is non free, and therefore do a capital charge for the usage of the capital employed by the corporation in its operations ( O’Hanlon and Peasnell, 1998 ) . The most popular value-based public presentation step is Stern Stewart ‘s Economic Value Added ( hereafter EVA ) .
EVA is fiscal public presentation step that most accurately reflects company ‘s true net income ( Stewart, 1991 ) . EVA is the deliberate after subtracting the cost of equity capital and debt from the operating net incomes. EVA is a revised version of Residual Income ( RI ) with a difference the manner the economic net income and the economic capital are calculated. Coined and popularized by New York based direction consultancy house Stern Stewart & A ; Co. in 1991, EVA over the old ages has gained popularity as a dependable step of corporate public presentation. In the ulterior old ages, the construct has received acknowledgment and support from assorted corporate houses ; those adopted it as an internal control step. The merchandising point of EVA is that it considers economic net incomes and economic capital in order to cognize the value created and destroyed by an organisation during a peculiar period. Economic net income and economic capital is calculated by doing certain accommodations into the accounting net incomes. There exist anomalousnesss in the academic literature about the figure of accommodations required to make economic net income and economic capital. Stern Stewart & A ; company have suggested 164 such accounting accommodations to change over GAAP net incomes to economic net incomes. Another of import point in computation of EVA is computation of the cost of capital ( WACC ) . As suggested by assorted research workers, cost of equity capital under EVA may be calculated utilizing Capital Assets Pricing Model ( CAPM ) .
The basic aim of this paper is to supply empirical grounds about the high quality of EVA, as claimed by EVA advocates in comparing to traditional accounting based steps in explicating the Market Value Added ( MVA ) . We have examined the association of EVA alongwith five traditional accounting public presentations steps ( NOPAT, ROCE, RONW, EPS and OCF ) with MVA utilizing a sample of 97 Indian companies for the period 2000 to 2008 and tested the averment that EVA is better linked with market value added as compared to traditional public presentation steps. Contrary to the claim of Stern- Stewart & A ; Co. , we report that accounting gaining based steps such as NPAT and OCF are better in explicating the market value of the sample companies. We find grounds back uping the earlier work of Peterson and Peterson ( 1996 ) , Biddle et Al. ( 1997 ) , Chen and Dodd ( 2001 ) , Kim ( 2006 ) and Ismail ( 2006 ) that traditional accounting based steps are more associated with market value added than EVA. However, our incremental information content trials reveal that EVA makes a fringy part to information content beyond traditional public presentation steps such as NOPAT, OCF, EPS and RONW etc. Overall, our consequences do non back up the hypothesis that EVA is superior than traditional accounting based steps in association with market value of the house. The survey concludes that other non- fiscal variables such as employees, merchandise quality community satisfaction should be considered in order to capture the unexplained fluctuation in the market value of the house.
The balance of the paper is organized as follows: subdivision 2 presents a brief history of the literature reappraisal, subdivision 3 explains the informations, variables and hypothesis of the survey, subdivision 4 nowadayss exemplary specifications, subdivision 5 nowadayss empirical analysis & A ; findings and the decision is presented in subdivision 6.
2. LITERATURE REVIEW
There is a turning argument in the academic literature about which public presentation steps that best explain alteration in market value of the houses. Assorted surveies have been conducted during last two decennaries, ab initio in the developed markets like US and subsequently in the other states to cognize whether it is truly better to utilize modern value-based steps such as EVA, CVA, NPV, stockholders value added ( SHV ) and other hard currency flows based steps than traditional accounting based public presentation steps ( NOPAT, ROCE, EPS, RONW ) to mensurate the corporate fiscal public presentation. The consequences are rather assorted and controversial. Several surveies have proved the high quality of EVA as a public presentation step ( Stewart, 1991 ; Milunovich and Tsuei, 1996 ; O’Byrne, 1996 ; Lehn and Makhija, 1997 ; Worthington and West, 2004 ; Irla, 2007 ; Lee and Kim, 2009 ) while others ( Biddle et al. , 1997 ; Kramer and Pushner, 1997 ; Chen and Dodd, 1997 ; 2000 ; Chen and Dodd, 2001 ; Worthington and West, 2001 ; Ismail, 2006 ; Kyriazis and Anastassis, 2007 ; Ramana, 2007 ; Ismail, 2008 ) provided different and opponent consequences. Some of the of import surveies about the assorted corporate public presentation steps are presented in this subdivision.
Stewart ( 1991 ) provided grounds of the correlativity between EVA and MVA. Using a sample US companies and analyzing both changeless and alterations in EVA and MVA, he found that there is a relationship between both the degrees of EVA and MVA. Since the correlativity between alterations in EVA and MVA was high, Stewart suggested that following the end of maximizing EVA and EVA growing would in fact construct a premium into the market value of the company. In a major survey by Stern ( 1995 ) argues that the accounting steps such as net incomes, net incomes growing, dividends, dividend growing, ROE, or even hard currency flow are non cardinal steps of corporate public presentation, but in fact EVA is one such step that is closely linked with market value of company.
Milunovich and Tsuei ( 1996 ) investigated the correlativity between often used fiscal steps ( including EVA ) and the MVA of companies in the US computing machine engineering industry. The consequences clearly province that EVA demonstrated the best correlativity and it would be just to deduce that a company that can systematically better its EVA should be able to hike its MVA and therefore its stockholders ‘ value. O’Byrne ( 1996 ) conclude that EVA explains more than twice as much of the discrepancy in market/capital ratio as NOPAT when the EVA theoretical account has positive and negative EVA coefficients, and an ln ( capital ) term. He besides showed that EVA alterations explain significantly more of the fluctuation in market value alterations
Lehn and Makhija ( 1997 ) studied the relationship between six public presentation steps and stock returns. The consequences revealed that EVA and MVA are effectual steps of public presentation. Furthermore, the correlativity of EVA with stock returns ( .59 ) was somewhat higher than the correlativity of MVA ( .58 ) , ROE ( .46 ) , ROA ( .46 ) , or ROS ( .39 ) . Therefore, EVA and MVA appear to be slightly better long-term public presentation steps than conventional accounting public presentation steps. Irala ( 2007 ) analyzed whether Economic Value Added ( EVA ) has got a better prognostic power relation to the traditional accounting steps such as EPS, ROCE, RONW, Capital Productivity ( Kp ) and Labor Productivity ( Lp ) . Analysis of 1000 companies across 6 old ages ( 6000 company old ages ) , really much supports the claim that the EVA is the better forecaster of market value compared to other accounting steps. EVA is deriving acknowledgment as cardinal step of company public presentation despite the fact that it has been in being for a comparatively short span of clip.
In another survey by Misra and Kanwal ( 2007 ) about Indian companies argued that accounting based prosodies are misdirecting steps of corporate fiscal public presentation as they are vulnerable to “ accounting deformations ” . Consequences of their survey reveal that EVA ( % ) is the most important determiner of MVA as it explains the fluctuations in portion value better than the other conventional accounting based steps of houses ‘ fiscal public presentation. Lee and Kim ( 2009 ) introduced Refined EVA ( REVA ) to the cordial reception industry and compared it to EVA, market value added ( MVA ) and other traditional accounting steps ( hard currency flow from operations ( CFO ) , return on assets ( ROA ) , and return on equity ( ROE ) . The survey provides interesting and meaningful findings that REVA and MVA can be considered good public presentation steps throughout the three cordial reception sectors ( i.e. , hotel, eating house and casino ) . Harmonizing to the findings, REVA and MVA significantly explain the market adjusted return by showing positive coefficients.
On the other manus, Biddle et Al. ( 1997 ) tested the averments that EVA is more extremely associated with stock returns and house ‘s value than accrual net incomes, and evaluated which constituent of EVA, if any, contributed to these associations. The consequences indicated that net incomes ( R2 =12.8 % ) were significantly associated with market adjusted one-year returns than either Residual Income ( R2 = 7.3 % ) or EVA ( R2 = 6.5 % ) and that all three of these steps dominate hard currency from operations ( R2 =2.8 % ) . The empirical consequences sing comparative information content, instead suggest that net incomes by and large outperform EVA. Similar consequences were revealed by Kramer and Pushner ( 1997 ) by analysing the strength of the relationship between EVA and MVA, utilizing the Stern Stewart 1000 companies for the period between 1982 and 1992.They found that although MVA and NOPAT were positive on norm, the mean EVA over the period was negative. No clear grounds is found to back up the contention that EVA is the best internal step of corporate success in adding value to stockholders ‘ investing.
Chen and Dodd ( 2001 ) through empirical observation examined the value-relevance of three profitableness measures- Operating Income ( OI ) , Residual Income ( RI ) , and Economic Value Added ( EVA ) and concluded that the market may put higher trust on audited accounting net incomes than the unaudited EVA metric. Their findings failed to back up the averment that EVA is the best step for rating intents. Ismail ( 2006 ) in a survey about UK companies tested the comparative and incremental information content of EVA and other public presentation steps utilizing panel informations arrested development. The consequences of the survey fail to back up the Stern- Stewart hypothesis as net runing income after revenue enhancements and net income outperform EVA and residuary income. The paper concludes that apart from fiscal variables other factors like employee, client satisfaction and R & A ; D initiatives must be considered to capture the alterations in the stock return.
Similarly, Kim ( 2006 ) provides empirical grounds on the comparative and incremental information content of EVA and traditional public presentation steps, net incomes, and hard currency flow of cordial reception industry of U.S. The information content of EVA and other explanatory variables indicates that net incomes are more utile than hard currency flow in explicating the market value of cordial reception houses. Kyriazis and Anastassis ( 2007 ) investigated the comparative explanatory power of the Economic Value Added ( EVA ) theoretical account with regard to stock returns and houses ‘ market value. They conclude that net and runing income ( NOPAT and OP ) appear to be more value relevant than EVA in explicating the market value of houses listed at Athens Stock Exchange ( ASE ) .
Ismail ( 2008 ) supply grounds sing Economic Value Added ( EVA ) and company public presentation in Malaysia. The survey sought to explicate the ability of EVA, compared to traditional tools, in mensurating public presentation under assorted economic conditions ; pre-economic crisis, during economic crisis and post-economic crisis period. The consequence of the survey found that traditional tools peculiarly EPS is able to correlate and had a relationship with stock returns. Further the survey revealed that EVA is besides able to correlate with stock returns and is superior in explicating the fluctuations in the stock returns as compared to the traditional tools under changing economic conditions. Maditinos et Al. ( 2009 ) examined the explanatory power of two value-based public presentation measuring theoretical accounts, EVA and SVA, compared with three traditional accounting public presentation steps: net incomes per portion ( EPS ) , return on investing ( ROI ) , and return on equity ( ROE ) , in explicating stock market returns in the Athens Stock Exchange ( ASE ) . Relative information content trials reveal that stock market returns are more closely associated with EPS than with EVA or other public presentation steps. However, incremental information content trials suggest that the pairwise combination of EVA with EPS increases significantly the explanatory power in explicating stock market returns.
Therefore, literature on assorted public presentation steps reveals that net incomes by and large dominate in explicating stock returns. But public presentation indexs based on net incomes are criticized by assorted research workers non integrating full cost of capital in computation of returns available for stockholders. Of late, assorted research workers have started harmonizing importance to value added steps, EVA being one of them. Consequences are rather assorted from both, developed and developing markets. Further, most of the surveies are from developed states and really small grounds exists about emerging market like India. This motivates us to analyze the extremely controversial but of import Stern- Stewart averment sing the high quality of EVA in Indian context and contribute to the bing literature.
3. DATA AND VARIABLES
3.1 Sample Selection
Our sample consists of 97 non-financial companies all listed on Bombay Stock Exchange ( BSE ) . Initially, a sample of top 200 companies was selected from BT-500 ( India ‘s most valuable companies, Business Today, 2006 ) . The principle behind choosing BT-500 as sample base is that these companies are ranked on the footing of market capitalisation in the Indian stock market and therefore, can be considered as India ‘s most valuable companies. The concluding sample was constructed utilizing following standards ; Firms must be available during the survey period of twelvemonth 2000 to twelvemonth 2008. Because of the specific nature of their activities, houses related to banking, fiscal and non- banking fiscal establishments are excluded from the sample. Some houses with losing informations were besides removed from the sample. The concluding sample, after sing any losing informations, consists of 97 houses. Thus a balanced panel set of 873 firm- twelvemonth observations was obtained, with observation of 97 houses over the period 2000 to 2008. The information required for the intent of this survey has been taken from the Prowess and Capitaline database. Further, data related to EVA and MVA has been taken from BT-SS study ( Business Today, 2000 ) and computed utilizing the methodological analysis used in the study.
3.2 Variables definition
The survey examines the association of EVA and traditional earning based with the market value of the companies. To accomplish this, market value added ( MVA ) is used as dependent variable. Market value of the company includes both the market value of the equity every bit good as debt. MVA measures the value added by the direction over and above the capital invested in the company by its stockholders and loaners. It is the cumulative sum by which a company has enhanced or diminished stockholders wealth ( Kaur and Narang, 2009 ) . Similar variable was used by Kim, 2006 ; Vijayakumar and Selvi, 2007 ) in their surveies about U.S. cordial reception industry and Indian car industry severally. Alongwith market value added as dependent variable, economic value added ( EVA ) , return on capital employed ( ROCE ) , return on net worth ( RONW ) , net incomes per portion ( EPS ) , net runing net incomes after revenue enhancements ( NOPAT ) and hard currency flow from operations ( CFO ) are used as explanatory variables. Table I. summarizes the variable definitions and computations.
3.3 Hypothesiss of the survey
The premier intent of our survey is to supply groundss about the high quality of EVA over the traditional public presentation steps. To accomplish this, comparative and incremental information content of EVA and traditional public presentation steps are analysed. Relative information content comparings examine if one step provides greater information content than another. On the other manus, incremental information content comparings assess whether one step provide more information content than another. The undermentioned hypotheses were formulated in the present survey to analyze the comparative and incremental information content of assorted public presentation steps.
Hypothesis 1: The comparative information content of EVA is superior to traditional public presentation steps ( NOPAT, RONW, ROCE, EPS and OCF ) in explicating market value of Indian companies.
Hypothesis 2: EVA adds information content to that provided by NOPAT, RONW, ROCE, EPS and OCF in explicating market value of houses
4. THE MODEL SPECIFICATION
The present survey examines the comparative and incremental information content of assorted public presentation steps and their association with MVA utilizing OLS arrested development analysis. To accomplish this, we developed six simple arrested development theoretical accounts to compare the comparative power of each explanatory variable. Our methodological analysis is based on the similar work of Kim, 2006 ; Irala, 2007 ; Ismail, 2008 and Vijayakumar and Selvi, 2008. The simple arrested development theoretical accounts used are as follow:
MVAit =I?0 + I?1EVAit + Iµit aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦.. ( 1 )
MVAit =I?0 + I?1NOPATit + Iµit aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ . ( 2 )
MVAit =I?0 + I?1ROCEit + Iµit aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦.. ( 3 )
MVAit =I?0 + I?1RONWit + Iµit aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ . ( 4 )
MVAit =I?0 + I?1EPSit + Iµit aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ . ( 5 )
MVAit =I?0 + I?1OCFit + Iµit aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ . ( 6 )
Where: MVAit, sum of market value added for the house I in period T ; EVAit, sum of economic value added of house I in period T ; NOPATit, cyberspace runing net incomes after revenue enhancements for house I in period T ; ROCEit, ratio of gaining before revenue enhancements to capital employed for house I in period T ; RONWit, ratio of net income after revenue enhancement to networth for house I in period T ; EPSit, net income to entire figure of portions outstanding for house I in period T ; OCFit hard currency flow from operations for house I in period T ; Iµit, stochastic mistake term for house I at clip T and i= 1, aˆ¦aˆ¦.97 and t= 1, aˆ¦aˆ¦9.
Further, to prove hypothesis sing the incremental content of EVA, NOPAT, ROCE, RONW, EPS and OCF, multiple additive arrested development theoretical accounts are used. The present survey usage two separate multiple arrested development theoretical accounts, one with all explanatory variables and another after exclusion of EVA.
MVAit =I?0 + I?1EVAit+ I?2 NOPATit + I?3 ROCEit + I?4 RONWit + I?5 EPSit + I?6 OCFit + Iµit
aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ ( 7 )
MVAit =I?0 + I?1NOPATit+ I?2ROCEit+ I?3 RONWit + I?4 EPSit + I?5 OCFit + Iµit
aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ ( 8 )
Where: MVAit, sum of market value added for the house I in period T as above ; EVAit, sum of economic value added of house I in period T ; NOPATit, cyberspace runing net incomes after revenue enhancements for house I in period T ; ROCEit, ratio of gaining before revenue enhancements to capital employed for house I in period T ; RONWit, ratio of net income after revenue enhancement to networth for house I in period T ; EPSit, net income to entire figure of portions outstanding for house I in period T ; OCFit hard currency flow from operations for house I in period T ; Iµit, stochastic mistake term for house I at clip T ; and i= 1, aˆ¦aˆ¦.97 and t= 1, aˆ¦aˆ¦9.
5. Empirical RESULTS AND ANALYSIS
5.1 Descriptive Statisticss
Table II provides sum-up of descriptive statistics of MVA ( dependent variable ) and six explanatory variables used in the survey. It is apparent from the Table that all public presentation steps considered in the present survey have a positive mean value. MVA has 2623.32 as average value of Indian companies whereas average value of EVA is 10.95, which implies that most of Indian companies included in the survey are able to gain more than the cost of capital. Postpone farther reveals that median EVA value is negative ( -0.59 ) , whereas average value of all other steps exhibit positive values. Another of import observation is that MVA has the largest mean and average followed by OCF, NOPAT, EPS, ROCE, RONW and EVA. These consequences are partly consistent with many international surveies with similar and different variables. Low values of EVA are noticed, since in the long term, companies can non go on to gain more than the cost of capital due to competitiveness of markets as companies can non gain supranormal growing over long clip.
Pair-wise correlativities between dependent variable and independent variables are presented in Table III. We observe that all the variables are positively correlated with each other. EVA is positively correlated with MVA ( 0.483 ) with statistical important value at 1 percent degree but lower correlativity as compared to NOPAT and OCF. Highest correlativity value can be observed between NOPAT, OCF and ROCE, RONW. It is of import to observe from the tabular array that EVA under-perform traditional accounting steps ( NOPAT and OCF ) , which reject the claim of EVA advocators ( e.g. Stewart, 1990 ; O’Byrne, 1996 ; Makelainen, 1998 ; Taufik et.al, 2008 ) that it is extremely associated with MVA or stock returns.
5.2 Relative Information content trial
In Table IV, we report the consequences of comparative information content trial of every independent variable. The appraisal is made by analysing six separate arrested developments for each public presentation measures i.e. EVA, NOPAT, ROCE, RONW, EPS and OCF. This appraisal is done by OLS arrested developments based on equations ( 1 ) to ( 6 ) . Table IV reveals coefficients and adjusted R2 values of each variables alongwith F statistics. First, we find that all of the arrested developments, except EPS are important harmonizing to F statistics at the.01 degree. Similarly, the coefficients result suggest that in footings of comparative information content of all six explanatory variables, except EPS ( p=.465 ) , all public presentation steps are statistically important at the degree of.01. Relative information content trial as measured by adjusted R2 of six arrested developments is besides presented in the Table IV. The trial consequences suggest that accounting net incomes ( NOPAT ) have the greatest ability to explicate market value of Indian companies with adjusted R2 of 44.98 per centum. Following, OCF has significantly larger adjusted R2 ( 31.44 % ) followed by EVA, RONW and ROCE. Economic value added, a value based public presentation steps stand 3rd with adjusted R2 in footings of explanatory power and thereby corroborating that net incomes dominate in explicating the fluctuations in market value of Indian companies. One of import observation from the Table IV is that EPS, accounting gaining based public presentation step contribute negatively ( adjusted R2 = -0.48 ) in footings of explanatory power of the public presentation steps. Furthermore the coefficients value about EPS is non statistically important at any degree of significance. The consequence of the present survey fails to corroborate Hypothesis 1 that comparative information content of EVA is superior to traditional public presentation steps ( NOPAT, RONW, ROCE, EPS and OCF ) in explicating steadfast value of Indian companies. Our consequences related to comparative information trial are consistent with many international surveies ( Chen and Dodd, 1997 ; Biddle et al. , 1998 ; Ray, 2001 ; Worthington & A ; West, 2001 ; Peixoto, 2002 ; de Wet, 2005 ; Ismail, 2006 ; Kim, 2006 ; Kyriazis and Anastassis, 2007 ; Vijayakumar and Selvi, 2007 ; Visaltanachoti et al. , 2008 ; Maditinos et al. , 2009 ) but different from many surveies ( Irla, 2007 ; Sunitha, 2008, Taufik et al. , 2008 )
Finally, the consequences of our OLS arrested developments lead to the decision that EVA does non surpass NOPAT and OCF. So, our comparative information content tests discard the claim of EVA advocates that EVA is far best public presentation step that explains market value of a house.
5.3 Incremental Information content trial
As discussed earlier, incremental information content comparings assess whether one step provide more information content than another. Table Volt shows the consequences of the incremental information content trial of all six explanatory variables. Before running the OLS arrested development theoretical accounts, we detect the presence of first-order autocorrelation among the remainders. For this intent, we used Durbin Watson ( D-W ) statistics. The D-W statistics of the remainders report 1.92 and 1.85 severally for arrested development equations ( 7 ) and ( 8 ) . Durbin-Watson statistic, ranges in value from 0 to 4 with an ideal value of 2 bespeaking that mistakes are non correlated ( eNumerys, 2009 ) . Analysis of D-W statistics suggests no presence of auto-correlation in the information. To observe the presence of multicollinearity, discrepancy rising prices factor ( VIF ) was besides analysed. A general regulation is that the VIF should non transcend 10 ( Belsley, Kuh, & A ; Welsch, 1980 ) .VIF values of all independent variables was in scope with a highest value of 6.253 for NOAPT bespeaking a low grade of multicollinearity among the variables.
In order to find the incremental information content of EVA, we used two arrested development theoretical accounts ( equation 7 and 8 ) , with all variables and another arrested development theoretical account except EVA. The overall theoretical account consequences suggest that both model 1 and 2 are important with F-values ( 34.199 and 31.064 ) statistically important at.01 degrees. Consequence about coefficients reveals that merely NOPAT, OCF and EVA are statistically important and can be included in the theoretical account. OCF has negative association whereas NOPAT and EVA are positively related with MVA. We besides observe addition in the value of R2 ( coefficient of finding ) from 65.3 per centum to 67.4 per centum in theoretical account 1 and model 2 severally. Further, the overall addition in adjusted R2 is minimum ( 1.9 % ) between the first theoretical account with NOPAT, RONW, ROCE, EPS and OCF and the 2nd arrested development on all six independent variables. Therefore, we can reason that although, the part of EVA in explicating market value of Indian companies is little but increased R2 is statistically important. So, our consequences accept Hypothesis 2 and thereby reasoning that EVA still adds incremental information to that provided by NOPAT, RONW, OFC, ROCE and EPS in explicating the MVA of Indian companies.
6. SUMMARY AND CONCLUSION
EVA has gained monolithic popularity in the academe and attracted some of the largest corporation to implement EVA as public presentation measuring system. There is turning argument about what act upon the market value of the company. Assorted research workers have criticized net incomes based public presentation steps due to their inability to integrate full cost of capital. Since so, there is turning sum of literature on the efficiency of the assorted public presentation steps and their relationship with market value of the company. These consequences of the surveies are assorted proposing that erstwhile traditional steps outperform value based steps and another back uping the high quality of value added steps in footings of their associations with market value of the company. The premier aim of the present survey is to happen empirical grounds about the association of EVA along with traditional public presentation steps with market value added and lend to the bing literature. To accomplish this, we test the relation and increment information content of all six explanatory variables ( NOPAT, EVA, ROCE, RONW, FCF and EPS ) about 97 Indian companies for the period from 2000 to 2008.
The empirical consequences of the survey do non back up the claim that EVA is a better public presentation index than traditional accounting steps in explicating market value. Our comparative information content trial reveals that NOPAT and OCF outperform EVA in their association with market value. Our findings sing comparative information content support the findings of many international surveies that EVA is non superior to traditional accounting steps in its association with house values. The consequences sing incremental information content trial of assorted public presentation steps revealed that EVA somewhat adds to incremental information to that provided by NOPAT, RONW, OFC, ROCE and EPS in explicating the MVA of Indian companies. Our findings, in amount, do non back up the claim of Stern Stewart & A ; Company that EVA is superior to other steps in explicating MVA. It was besides apparent from the consequences that one-variable EVA theoretical account is non able to capture more than 23 per centum of the fluctuations in the market value of Indian companies. This implies that there are other factors that drive market value and should be taken into history for stockholders ‘ value creative activity or for public presentation measuring. As suggested by Chen and Dodd ( 2001 ) there are assorted factors related to clients, employees and community satisfaction, merchandise quality, R & A ; D inventions those affect the market value of houses apart from fiscal variables.
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Table I. Definition of independent variables
Variable
Definition
Symbol used
Economic value added
Net runing net incomes adjusted for cost of capital ( NOPAT- Total Cost of capital )
EVA
Net runing net incomes after revenue enhancements
Net incomes after revenue enhancements
NOPAT
Tax return on capital employed
Ratio of net incomes before involvement and revenue enhancements to capital employed
ROCE
Return on net worth
Ratio of net income after revenue enhancements to net worth
RONW
Gaining per portion
Ratio of net income to figure of portions outstanding
EPS
Cash flow from operations
( runing hard currency flows )
Company ‘s net hard currency flow ensuing straight from its regular operations
( NOPAT adjusted for points ) .
OCF
Table II. Descriptive statistics of dependant and explanatory variables
Variable
Obs.
Mean
Median
S.D
Minimum
Maximum
MVA
97
2623.324433
630.94
6002.853
-394.21
254462.5
EVA
97
10.95546392
-0.59
195.9894
-774.15
1062.68
RONW
97
22.90106529
20.78333
12.44447
3.112222
2221.403
NOPAT
97
371.2425165
113.7389
844.0958
-79.5367
36010.52
ROCE
97
26.14649485
20.79667
16.78594
4.1
2536.21
EPS
97
31.87802978
20.09778
48.65719
1.371111
3092.169
OCF
97
438.8973998
144.3756
1152.521
-615.67
10467.66
Notes: MVA- market value added ; EVA- economic value added ; RONW- return on net worth ; NOPAT-net operating net income after revenue enhancements ; ROCE- return on capital employed ; EPS- earning per portion ; OCF- runing hard currency flows
Table III. Correlation Matrix
MVA
EVA
RONW
NOPAT
ROCE
EPS
OCF
MVA
1
EVA
.483**
1
RONW
.396**
.546**
1
NOPAT
.675**
.161
.148
1
ROCE
.336**
.519**
.917**
.102
1
EPS
.075
.087
.061
.114
.111
1
OCF
.567**
.050
.065
.975**
.035
.097
1
Notes: ** , correlativity is important at the 0.01 degree, MVA- market value added ; EVA- economic value added ; RONW- return on net worth ; NOPAT-net operating net income after revenue enhancements ; ROCE- return on capital employed ; EPS- earning per portion ; OCF- runing hard currency flows
Table IV. Test consequences of the comparative information content of EVA, RONW, NOPAT, ROCE, EPS and OCF utilizing OLS arrested development steps
NOPAT
OCF
EVA
RONW
ROCE
EPS
Coefficients
1.042 ( 8.915 ) *
0.965 ( 6.710 ) *
0.733 ( 5.373 ) *
0.447 ( 4.202 ) *
0.391 ( 3.479 ) *
0.098 ( 0.734 )
P-value
0.000
0.000
0.000
0.000
0.001
0.465
F
79.472*
45.030*
28.864*
17.660*
12.105*
0.539
R2 ( per centum )
45.55
32.16
23.30
15.68
11.30
0.56
Adj. R2 ( per centum )
44.98
31.44
22.50
14.79
10.37
-0.48
Notes: MVA-measure market value added ; EVA- economic value added ; RONW- return on net worth ; NOPAT-net operating net income after revenue enhancements ; ROCE- return on capital employed ; EPS- earning per portion ; OCF- runing hard currency flows ; * statistically important at 1 % degree.
Table V. Test consequences of the incremental information content of EVA, RONW, NOPAT, ROCE, EPS and OCF
Model 1
Model 2
Independent variables
RONW
.130 ( .708 )
.083 ( .461 )
NOPAT
3.425 ( 7.246 ) *
2.943 ( 5.880 ) *
ROCE
.075 ( .407 )
.029 ( .159 )
EPS
-.046 ( -.562 )
-.051 ( -.633 )
OCF
-2.725 ( -5.300 ) *
-2.216 ( -4.088 ) *
EVA
–
.292 ( 2.449 ) *
R2
.653
.674
Adjusted R2
.634
.653
F-value
34.199*
31.064*
a?† R2
–
.019
Durbin-Watson
1.92
1.85
Notes: MVA-measure market value added ; EVA- economic value added ; RONW- return on net worth ; NOPAT-net operating net income after revenue enhancements ; ROCE- return on capital employed ; EPS- earning per portion ; OCF- runing hard currency flows ; t-statistics are provided in parenthesis ; *statistically important at 1 per centum degree.
