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1 – 10 of 578J.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). The best…
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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Board size has received significant attention among researchers and regulators. However, the advisory role of boards has not been studied much. In this study I examine the notion…
Abstract
Board size has received significant attention among researchers and regulators. However, the advisory role of boards has not been studied much. In this study I examine the notion that investors value larger boards for their advisory capabilities. Prior studies examine board size in the context of monitoring role of corporate boards and find opposite effects on debt holders and equity holders. Using market-based measures of total firm performance, which take both equity and debt into account; I find that larger boards are associated with greater economic value added (EVA). Using a sample of S&P 1500 firms from 2000 to 2003 and controlling for various firm and industry characteristics, I also find that the board size is positively associated with firm productivity and various other efficiency measures such as return on assets (ROA), return on equity (ROE) and Sales-Turnover ratio. I argue that firms with larger boards, valuing the advisory role of directors offer greater compensation to the directors. Overall the results indicate that large board size has a positive impact on firm's performance. The results are robust to alternative measures of firm performance and other key variables.
Cherif Guermat, Ismail U. Misirlioglu and Ahmed M. Al-Omush
This study aims to examine the long-term effects of adopting economic value added (EVA) as a compensation tool on managers’ behaviour.
Abstract
Purpose
This study aims to examine the long-term effects of adopting economic value added (EVA) as a compensation tool on managers’ behaviour.
Design/methodology/approach
The authors extend the sample used in prior studies both in the time and the cross-section dimensions.
Findings
The study conclusions are distinct from those offered by existing studies. The authors show that EVA adopters, relative to non-EVA adopters, increase the working capital cycle, use their assets less intensively and decrease their payouts to shareholders via a decrease in dividends and share repurchases. In investing decisions, the authors find a decrease in new investments, but no change in asset dispositions after the adoption of EVA compensation plans.
Originality/value
The study results highlight that the EVA adoption provides more incentives to reduce the total cost for capital rather than increasing operations and maximising shareholder wealth. The results also have implication for corporate management, particularly in the area of management compensation scheme design.
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Ravi S. Sharma, Priscilla Teng Yu Hui and Meng‐Wah Tan
This paper aims to study the economic significance of using a blended business and knowledge strategy through the lens of conventional financial management before and after the…
Abstract
Purpose
This paper aims to study the economic significance of using a blended business and knowledge strategy through the lens of conventional financial management before and after the implementation of KM initiatives in a knowledge‐intensive, high‐growth firm that had gone through business diversification through organic developments as well as mergers and acquisitions for over a decade.
Design/methodology/approach
The economic value added (EVA) method is proposed as a measure of the effective usage of capital funding in the firm before and after its KM program. The extent of the economic impact due to the contributions of various KM strategies was analyzed using standard financial management reporting. This enabled the derivation of follow‐on KM initiatives that were consistent with the target objectives.
Findings
The EVA method was found to be valid and credible in determining the net impact of various KM initiatives. This was in a form that was comprehensible to top management and KM decision‐makers.
Research limitations/implications
Knowledge management as a strategic imperative has gained significance over the past decade for its ability to handle the complexity of information to further create, transfer and reuse intellectual capital. More importantly, KM is seen as the key business enabler across different enterprises for its ability to enhance competitiveness and shareholder value. The EVA method used in this paper has allowed the valuation of KM initiatives.
Practical implications
The emergence of KM as a blended business strategy has hence proved to be vital for the sustainability of the knowledge‐driven business model that looks beyond the physical and financial into intellectual and social capital.
Originality/value
The paper presents a longitudinal case study of a fairly large East Asian conglomerate.
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E. Hachemi Aliouche, Fred Kaen and Udo Schlentrich
This paper's aim is to examine the risk‐adjusted market performance of an overall franchise and three sub‐sector franchise common stock portfolios from 1990 through 2008.
Abstract
Purpose
This paper's aim is to examine the risk‐adjusted market performance of an overall franchise and three sub‐sector franchise common stock portfolios from 1990 through 2008.
Design/methodology/approach
Four sets of franchise sector portfolios are constructed, their returns are calculated, and their performances relative to three market benchmarks are evaluated using the Sharpe ratio and Jensen's α.
Findings
The all franchise portfolio significantly outperformed the three market benchmarks. Among the sector portfolios, the services and restaurant portfolios also outperformed the market benchmarks, but not the lodging portfolio. Results support the theoretical hypothesis that franchising may provide superior advantages to investors and point to a possible “franchising anomaly”. Investors consider franchise firms to be less risky than the average publicly traded firms and therefore require a lower rate of return.
Practical implications
The results of the study suggest that in the past, franchise managers may have paid a much higher cost of capital than warranted by their firms' risk characteristics. Study results also have positive implications for franchise firms' access to capital and for evaluating franchise managers' compensation arrangements. Investors should consider allocating a portion of their investible funds to franchise stocks. Many lodging firms may not have taken full advantage of the benefits of franchising to reduce their financial risks. Restaurant firms may further improve their financial performance by selling their riskier units.
Originality/value
This is the first comprehensive study of the risk‐adjusted market performance of franchise firms over an extended period of time covering a variety of economic conditions that also analyzes the risk‐adjusted performance of the main business subcategories in franchising.
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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). We…
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.
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Xiaoming He and Ao Chen
This paper aims to explore the impact of a firm’s political connections on its economic value added (EVA) performance while treating connection heterogeneity and product…
Abstract
Purpose
This paper aims to explore the impact of a firm’s political connections on its economic value added (EVA) performance while treating connection heterogeneity and product diversification as moderators.
Design/methodology/approach
Based on data collected from 1,143 Chinese manufacturing listed firms in China’s A-share market from 2012 to 2017, this study conducted panel data analysis to investigate proposed relationships.
Findings
The findings provide evidence that political connections promote EVA performance of enterprises and both connection heterogeneity and product diversification negatively moderate the political connections – EVA performance relationship.
Originality/value
Drawing sights from the resource-based view, this study investigates the influence of corporate political connections on EVA performance, considering contingent factors of connection heterogeneity and corporate strategy (i.e. product diversification). It, thus, contributes to the literature on political connections by providing additional evidence to explaining the inconclusive findings on the political connections–firm performance relationship and extending prior research by emphasizing the moderating roles of connection heterogeneity and corporate strategy. It also complements prior research on EVA performance by exploring its antecedents.
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Manju Tripathi, Smita Kashiramka and P.K. Jain
“Paying for performance” has been the corporate mantra for ages, but finding the right performance benchmarks continues to be an enigma. Equally significant is the ongoing debate…
Abstract
Purpose
“Paying for performance” has been the corporate mantra for ages, but finding the right performance benchmarks continues to be an enigma. Equally significant is the ongoing debate on the superiority of economic value added (EVA) aligned executive incentive plans over traditional financial performance benchmarks to ensure optimal goal congruence between the corporate and the executive performances. Consequently, this paper aims to explore a plausible linkage between executive compensation and EVA for Indian corporates from a social constructivist perspective.
Design/methodology/approach
The study uses a mixed method approach where the quantitative analysis of responses from the survey of senior personnel/finance executives of Indian firms is complemented by the qualitative analysis of personal interviews to provide contextual depth to the quantitative data.
Findings
Based on the study, the researchers construct an understanding that EVA is a superior concept but has restricted utility primarily owing to its computational complexity and unaudited characteristics. The researchers’ interpretive inference finds mandatory disclosure of an audited EVA figure in the corporate financial statements as a prime requirement for EVA to emerge as an objective and visible performance measure.
Practical implications
Attention of policymakers is sought towards standardising its computation and ensuring its disclosure to bring it at par with the conventional executive financial performance benchmarks.
Originality/value
The narrative on benefits and the challenges of adopting EVA aligned performance management system is provided directly by the top-level executives responsible for designing the “paying for performance” policies.
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Carlos J.O. Trejo-Pech, Karen L. DeLong and Robert Johansson
The United States (US) sugar program protects domestic sugar farmers from unrestricted imports of heavily-subsidized global sugar. Sugar-using firms (SUFs) criticize that program…
Abstract
Purpose
The United States (US) sugar program protects domestic sugar farmers from unrestricted imports of heavily-subsidized global sugar. Sugar-using firms (SUFs) criticize that program for causing US sugar prices to be higher than world sugar prices. This study examines the financial performance of publicly traded SUFs to determine if they are performing at an economic disadvantage in terms of accounting profitability, risk and economic profitability compared to other industries.
Design/methodology/approach
Firm-level financial accounting and market data from 2010 to 2019 were utilized to construct financial metrics for publicly traded SUFs, agribusinesses and general US firms. These financial metrics were analyzed to determine how SUFs compare to their agribusiness peer group and general US companies. The comprehensive financial analysis in this study covers: (1) accounting profit rates, (2) drivers of profitability, (3) economic profit rates, (4) trend analysis and (5) peer comparisons. Quantile regression analysis and Wilcoxon–Mann–Whitney statistics are employed for statistical comparisons.
Findings
Regarding various profitability and risk measures, SUFs outperform their agribusiness peers and the general benchmark of all US firms in terms of accounting profit rates, risk levels and economic profit rates. Furthermore, compared to other US industries using the 17 French and Fama classifications, SUFs have the highest return on investment and economic profit rate―measured by the Economic Value Added® margin―and the second-lowest opportunity cost of capital, measured by the weighted average cost of capital.
Originality/value
This study finds nothing to suggest that the US sugar program hinders the financial success of SUFs, contrary to recent claims by sugar-using firms. Notably in this analysis is the evaluation of economic profit rates and a series of robustness techniques.
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Kenneth M. Eades, Martson Gould and Jennifer Hill
The student's task is to develop a comprehensive strategy for Briggs & Stratton, which is facing severe competition and margin pressures. A major component of the strategy to be…
Abstract
The student's task is to develop a comprehensive strategy for Briggs & Stratton, which is facing severe competition and margin pressures. A major component of the strategy to be considered is whether to implement economic value added (EVA) as a new performance measurement for management. The case is designed to serve as an introduction to how to compute and use EVA. It emphasizes the importance of performance evaluation as part of a larger strategic plan. A teaching note is available to registered faculty, as well as two video supplements to enhance student learning.
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