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Article
Publication date: 1 January 2005

Janis K. Zaima, Howard F. Turetsky and Bruce Cochran

Studies that examine the relationship of economic value added (EVA) to market value did not isolate the EVA effect in conjunction with controlling for the economic effect…

Abstract

Studies that examine the relationship of economic value added (EVA) to market value did not isolate the EVA effect in conjunction with controlling for the economic effect of the market. Since the EVA metric is viewed as valueadded apart from the market, operational managers will benefit from a procedure that separates the market driven versus firm driven (EVA) effects. Our paper examines the effects of the economy and EVA on MVA. The results indicate that EVA and GDP significantly affect MVA. Furthermore, the MVA‐EVA relationship shows a systematic bias between the largest MVA firms and the smallest MVA firms. Overall, our study provides implications for corporate executives utilizing EVA to evaluate managerial performance linked to MVA.

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Review of Accounting and Finance, vol. 4 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 October 2005

J.HvH. de Wet

Several researchers and practitioners, notably Stern Stewart Consulting Company and Associates, have claimed that economic value added (EVA) is superior to traditional…

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1581

Abstract

Several researchers and practitioners, notably Stern Stewart Consulting Company and Associates, have claimed that economic value added (EVA) is superior to traditional accounting measures in driving shareholder value. Other researchers have refuted these claims by supplying data in support of traditional accounting indicators such as earnings per share (EPS), dividends per share (DPS), return on assets (ROA) and return on equity (ROE). This study endeavoured to analyse the results of companies listed on the JSE Securities Exchange South Africa, using market value added (MVA) as a proxy for shareholder value. The findings do not support the purported superiority of EVA. The results suggest stronger relationships between MVA and cash flow from operations. The study also found very little correlation between MVA and EPS, or between MVA and DPS, concluding that the credibility of share valuations based on earnings or dividends must be questioned.

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Book part
Publication date: 21 May 2021

Ilker Calayoğlu

Introduction: Data of companies in the Informatics index between 2008 and 2017 fiscal years were analyzed. In the analysis, the following ratios were used as traditional…

Abstract

Introduction: Data of companies in the Informatics index between 2008 and 2017 fiscal years were analyzed. In the analysis, the following ratios were used as traditional performance evaluation criteria: Return on assets, return on equity, earnings per share, price to earnings ratio, market to book value ratio, and return on sales rate. In addition, economic value added (EVA) was also used. The companies in the Informatics index are divided into sub-sectors according to by field of activity. These sub-sectors are software, communication, and hardware marketing.

Aim: To analyze the power of traditional performance evaluation methods to explain the market value added (MVA).

Method: Regression analysis and autocorrelation tests were used as research methods. These were done with IBM SPSS Statistics 25.

Findings: Models and rates that explain the MVA with the most meaningful results were calculated. These models and ratios are as follows: For the software sub-sector, a market to book value ratio was 77.8%; for the hardware marketing sub-sector, earnings per share was 65.4%; for the communication sub-sector, a market to book value ratio was 92.5%. Market to book value was the independent variable that describes the best MVA value of the two sub-sectors.

Originality of the Study: In this study, the average of the values of all companies in the BIST Informatics Index is not taken. By dividing into sub-sectors, value deterioration from the sector difference is prevented. It is stronger in terms of statistical science.

Implications: Researchers can look for and model the relationship between traditional evaluation criteria and EVA or other value-based evaluation criteria in the same index or other indices.

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Article
Publication date: 1 December 1999

N Zafiris and R Bayldon

The current search for operational criteria and tests of firm performance is largely focused on the Economic Value Added (EVA) framework. While reasserting the essential…

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1394

Abstract

The current search for operational criteria and tests of firm performance is largely focused on the Economic Value Added (EVA) framework. While reasserting the essential soundness of this approach the paper seeks to improve its application by proposing a version of EVA which anchors the opportunity cost of equity capital on market rather than book values. The case for this is argued on general grounds and the resulting model is convenient for examining the possible effects of the gearing factor. The practicability of the model is illustrated by applying the proposed ‘EVA’ formula to a mixed set of accounting and stock market data from a sample of UK companies.

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Journal of Applied Accounting Research, vol. 5 no. 2
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 25 October 2011

Satish Kumar and A.K. Sharma

The main objective of this study is to examine the claim of economic value added (EVA) proponents about its superiority as a financial performance measure compared to five…

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2602

Abstract

Purpose

The main objective of this study is to examine the claim of economic value added (EVA) proponents about its superiority as a financial performance measure compared to five traditional performance measures, i.e. net operating profit after tax (NOPAT), cash flow from operations (OCF), earnings per share (EPS), return on capital employed (ROCE) and return on equity (ROE) in Indian manufacturing sector, and simultaneously provide its empirical evidences. To achieve this, relative and incremental information content of various performance measures and their relationship with market value added (MVA) is tested and examined.

Design/methodology/approach

Principal component analysis (PCA) is one of the important multivariate methods utilized in business research for data reduction, latent variable modeling, multicollinearity resolution, etc. The present sample consists of 608 firm‐year observations from the Indian manufacturing sector for the period 2000‐2007. Firstly, principal component analysis (PCA) is employed to determine the important variables that explain market value. Secondly, alongside PCA, multiple regression models (OLS) are used to examine the relative and incremental information content of EVA and traditional performance measures.

Findings

These results about PCA reveal that variables like NOPAT, OCF, ROE, ROCE and EVA have maximum influence on the market value (MVA) of the sample companies, whereas EPS has a negative loading, so, EPS is discarded for further analysis. Further, the PCA loading matrix reveals that NOPAT, OCF, ROE and ROCE outscore EVA. The regression results regarding the relative information content test reveal that NOAPT and OCF outperform EVA in explaining the market value of Indian companies. The incremental information content test shows that EVA makes a marginal contribution to information content beyond NOPAT, OCF, ROCE and ROE. Overall, these empirical results about Indian companies do not support the Stern Stewart hypothesis that EVA is superior to traditional accounting‐based measures in association with market value of the firm.

Originality/value

The study concludes that along with financial variables, other non‐financial variables such as employees, product quality, etc., should be considered in order to capture the unexplained variation in the market value of Indian companies.

Details

Journal of Financial Reporting and Accounting, vol. 9 no. 2
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 9 April 2020

John Agustinus

This study aims to examine the relationship between corporate social responsibility (CSR) and market value added (MVA) through a more comprehensive analysis of the…

Abstract

Purpose

This study aims to examine the relationship between corporate social responsibility (CSR) and market value added (MVA) through a more comprehensive analysis of the relationship between the two variables.

Design/methodology/approach

The population used in this study is all companies listed on the IDX. Sample selection is done by purposive sampling method where the criteria chosen in this research are: listed on the IDX during 2010–2016 and published its annual financial statements completely. The analysis tools using panel parametric regression are based on the reciprocal relationship (MVA related to CSR, and CSR related to MVA). This model should be linearity, based on RESET test. On the other hand, an alternative model is based on a nonlinearity relationship (the linearity of parametric regression is not fulfilled), the modified panel nonparametric regression (accommodates the reciprocal and nonlinearity relationship).

Findings

Social responsibility or CSR shows a positive relationship with MVA, also the MVA has a positive relationship with CSR. This means that when CSR value increases, then MVA also increases, vice versa. When the company discloses CSR, the company maintains good relationships not only with its shareholders but also with other stakeholders including the community and its environment. Therefore, it can enhance the company's perception and reputation to shareholders that the company is a responsible company, in the sense of being responsible not only to shareholders but also to other stakeholders. This then makes shareholders interested to invest their capital in companies with good CSR. Increased capital by shareholders in the form of stock purchases can affect the high or low stock price of a company; if the company price is high, then the higher the value of its MVA because the stock price is an element of MVA.

Originality/value

Based on the aforementioned phenomenon, the relationship has the reciprocal characteristics, which means that CSR has a relationship with MVA; on the other hand, MVA also has a relationship with CSR (with a different time lag). Also, this study detects the nonlinearity relationship between variables shown in Fernandes and Fresly (2017). This part as the originality of this paper focused on the reciprocal and nonlinearity relationship between CSR and MVA.

Details

Property Management, vol. 38 no. 3
Type: Research Article
ISSN: 0263-7472

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Article
Publication date: 27 September 2011

Satish Kumar and A.K. Sharma

The purpose of this paper is to examine the claim of economic value added (EVA) proponents about its superiority as a corporate financial performance measure, compared to…

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1663

Abstract

Purpose

The purpose of this paper is to examine the claim of economic value added (EVA) proponents about its superiority as a corporate financial performance measure, compared to traditional performance measures in non‐financial Indian companies and provide empirical evidences.

Design/methodology/approach

The paper uses a sample of 873 firms‐year observations from the Indian market and applies pooled ordinary least square regression to test the relative and incremental information content of EVA and other accounting‐based measures in explaining the market value added.

Findings

The results about relative information content test reveal that NOAPT and OCF outperform EVA in explaining the market value of Indian companies. Incremental information content test shows that EVA makes a marginal contribution to information content beyond traditional performance measures such as NOPAT, OCF, EPS and RONW, etc. Overall the authors' results do not support the hypothesis that EVA is superior to traditional accounting‐based measures in association with market value of the firm.

Originality/value

The authors conclude that non‐financial variables such employees, product quality and community satisfaction should be considered in order to capture the unexplained variation in the market value of the firm.

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Article
Publication date: 1 April 2004

J.H. de Wet and J.H. Hall

It is generally believed that in order to maximise value for shareholders, companies should strive towards maximising MVA (and not necessarily their total market value)…

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1229

Abstract

It is generally believed that in order to maximise value for shareholders, companies should strive towards maximising MVA (and not necessarily their total market value). The best way to do so is to maximise the EVA, which reflects an organisation’s ability to earn returns above the cost of capital. The leverage available to companies that incur fixed costs and use borrowed capital with a fixed interest charge has been known and quantified by financial managers for some time. The popularisation of EVA and MVA has opened up new possibilities for investigating the leverage effect of fixed costs (operational leverage) and interest (financial leverage) in conjunction with EVA and MVA, and for determining what effect changes in sales would have through leverage, not only on profits, but also on EVA and MVA. Combining a variable costing approach with leverage analysis and value analysis opens up new opportunities to investigate the effect of certain decisions on the MVA and the share price of a company. A spreadsheet model is used to illustrate how financial managers can use the leverage effects of fixed costs and the (fixed) cost of capital to maximise profits and also to determine what impact changes in any variable like sales or costs will have on the wealth of shareholders.

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Article
Publication date: 1 October 2004

Kim Hiang Liow and Joseph T.L. Ooi

This study examines the influence of corporate real estate (CRE) on shareholder value using two value‐based measures: economic value added (EVA) and market value added (MVA

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3856

Abstract

This study examines the influence of corporate real estate (CRE) on shareholder value using two value‐based measures: economic value added (EVA) and market value added (MVA). We find that CRE has impacted negatively on non‐real estate firms' EVA and MVA in the period 1997‐2001. This happens for the non‐real estate corporations from different industries. Further, the higher the real estate asset intensity, the greater the negative impact on the firms' EVA and MVA. Our results have important implications for the traditional notion that there is a competitive advantage in owning CRE by diversified conglomerates. Specifically, more studies are needed to explore and compare the main reasons and motivations as to why Asian non‐real estate firms are still more involved with real estate activities than their counterparts in Europe and USA even though ownership of CRE appears to destroy shareholders' wealth.

Details

Journal of Property Investment & Finance, vol. 22 no. 5
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 1 March 2001

Abuzar M.A. Eljelly and Khalid S. Alghurair

This study examines the association between stock returns and wealth creation (as measured by Market Value Added, MVA) on the one hand, and various performance measures of…

Abstract

This study examines the association between stock returns and wealth creation (as measured by Market Value Added, MVA) on the one hand, and various performance measures of joint stock companies in Saudi Arabia. These measures include traditional accounting measures; Earning Per Share (EPS), Return on Equity (ROE), and Cash Flow (CF), as well as a relatively recent measure; the Economic Value Added (EVA). The study reveals strong links between various traditional accounting measures and show that those measures give similar indication of a company's overall performance. The results indicate that MVA and stock returns are associated with traditional accounting measures, but not with EVA. However, EPS is found to dominate other measures of performance with respect to its association with stock returns and MVA. The implications of this study are that investors in the Saudi market are most likely using simple traditional accounting performance measures in their valuing of companies, and hence more efforts should be directed to enforcing disclosure requirements for these measures.

Details

International Journal of Commerce and Management, vol. 11 no. 3/4
Type: Research Article
ISSN: 1056-9219

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