Evidence on Relative and Incremental Information Content of EVA Essay

Purpose: The chief aim of this survey is to analyze the claim of Economic Value Added ( EVA ) proponents about its high quality as a fiscal public presentation step compared to five traditional public presentation steps: cyberspace operating net income after revenue enhancement ( NOPAT ) , hard currency flow from operations ( OCF ) , net incomes per portion ( EPS ) , return on capital employed ( ROCE ) and return on equity ( ROE ) in Indian fabrication sector and supply empirical groundss. To accomplish this comparative and incremental information content of assorted public presentation steps and their relationship with market value added ( MVA ) is tested and examined.Design/Methodology: Chief constituents analysis ( PCA ) is one of the foremost multivariate methods utilized in concern research for informations decrease, latent variable mold, multicollinearity declaration, etc.

Our sample consists of 608 firms-year observations from the Indian fabrication sector for a period of 2000-2007. First, we employed Principal constituent Analysis ( PCA ) to find the of import variables that explains market value. Second, alongwith PCA multiple arrested development theoretical accounts ( OLS ) are used to analyze the comparative and incremental information content of EVA and traditional public presentation steps.Findingss: Our consequences about PCA reveal that variables like NOPAT, OCF, RONW, ROCE and EVA have maximal influence on the market value ( MVA ) of the sample companies, whereas EPS have negative burden so EPS is discarded for farther analysis. Further, PCA lading matrix reveals that NOPAT, OCF, RONW and ROCE outscore EVA.

Regression consequences about comparative information content trial reveals 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 NOPAT, OCF, ROCE and RONW. Overall our empirical consequences about Indian companies do non back up the Stern- Stewart hypothesis that EVA is superior than traditional accounting based steps in association with market value of the house.Originality/value: The survey concludes that alongwith fiscal variables other non- fiscal variables such employees, merchandise quality etc. should be considered in order to capture the unexplained fluctuation in the market value of the Indian companies.Keywords: Tax return on capital employed, EVA, MVA, comparative information content, incremental information trial, PCA.Paper Type: Research Paper

1. Introduction

Maximizing stockholders ‘ wealth is good recognized aim among corporate troughs in recent times.

The Corporate, that gave the lowest penchant to stockholders wonder are now confering the extreme penchant to it. Shareholders ‘ wealth is measured in footings of returns they receive on their investings ( Sharma & A ; Kumar, 2010 ) . It can either be in signifiers of dividend or in the signifier of capital grasp or both.

Capital grasp depends on the alterations in the market value of the stocks. The market value of stocks depends upon figure of factors runing from company specific to market particular. Fiscal information is used by assorted stakeholders to measure house ‘s current public presentation and to calculate the hereafter as good.Any fiscal steps used in measuring house ‘s public presentation must be extremely correlated with stockholders wealth and on the other manus should non be subjected to randomness inherent in it ( Sharma and Kumar, 2010 ) .

The assorted empirical surveies highlight that there is no individual accounting step which explains the variableness in the stockholders wealth ( Chen and Dodd, 1997 ; Rogerson, 1997 ) . Traditional public presentation steps such as NOPAT, EPS, ROI, ROE etc. have been criticized due to their inability to integrate full cost of capital thereby accounting income is non a consistent forecaster of house value and can non be used for mensurating corporate public presentation.Value based direction system has gained popularity in academic literature in last two decennaries. One such invention in the field of internal and external public presentation measuring is Economic Value Added ( EVA )[ 1 ]. Pioneered and advocated by US based concern adviser Stern Stewart and company argue that economic value added can be used alternatively of net incomes or hard currency from operations as steps of both internal and external public presentation. “ Abandon net incomes per portion ” , “ Net incomes, net incomes per portion, and net incomes growing are misdirecting steps of corporate public presentation ” and “ The best practical periodic public presentation step is Economic Value Added ( EVA ) ” ( Stewart 1991 ) .The empirical surveies such as Milunovich and Tsuei, 1996 ; O’Byrne, 1996 ; Uyemura et al.

, 1996 ; Biddle et al. , 1997 ; Chen and Dodd, 1997, 2001 ; Bao and Bao, 1998 ; De Villiers and Auret, 1998 ; Turvey et al. , 2000 ; Worthinton and West, 2001, 2004 ; Peixoto, 2002 ; Kyriazis and Anastasis, 2007 ; Maditinos et al. , 2009 have been conducted in the last two decennaries, ab initio in the developed markets like USA and subsequently in the remainder of the international market, to reply if “ it is truly better to utilize value-based than traditional accounting public presentation steps to mensurate the fiscal public presentation of corporations, or which fiscal public presentation step best explains corporations ‘ alteration of value created and destroyed ” . However, the consequences reported by the surveies are rather assorted and controversial.The basic aim of this survey is to analyze the claim of Economic Value Added ( EVA ) proponents about its high quality as a fiscal public presentation step compared to five traditional public presentation steps: cyberspace operating net income after revenue enhancement ( NOPAT ) , hard currency flow from operations ( OCF ) , net incomes per portion ( EPS ) , return on capital employed ( ROCE ) and return on equity ( ROE ) in Indian fabrication sector and supply empirical groundss about developing market.

For this intent, comparative and incremental information content of assorted public presentation steps and their relationship with market value added ( MVA ) is tested and examined. The construction of the survey is as follows: the undermentioned subdivision presents the brief history of reappraisal of literature, the following subdivision describes the information and methodological analysis used and the consequences of the statistical analysis are presented in the subdivision before the decision of the survey.

2. Literature Reappraisal

The empirical research for the value relevancy of traditional accounting and modern value-based public presentation steps is wide but with controversial consequences ( see Maditinos et al. , 2009 ) . As highlighted in the debut subdivision of the paper that there are assorted surveies for both developed and developing markets to prove the averment that which corporate public presentation steps better explains the alterations in stockholders ‘ value. This subdivision presents some of the outstanding surveies about the corporate public presentation steps.

2.1 Studies back uping the value based stepsStewart ( 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 ( 1994 ) 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 coefficient.. He besides showed that EVA alterations explain significantly more of the fluctuation in market value alterations.Uyemura et Al. ( 1996 ) studied the relationship between EVA alongwith traditional public presentation and MVA. They found that the correlativity between MVA and those steps are: EVA 40 per cent, ROA 13 per cent, ROE 10 per cent, NI 8 per cent and EPS 6 per cent.

The consequence concluded that EVA is better steps than ROA, ROE, NI and EPS in explicating the fluctuation in market value of the companies. Lehn and Makhija ( 1997 ) examined 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. 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.2.2 Studies back uping high quality of Traditional corporate public presentation stepsBiddle 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 constituents 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. Furthermore, Worthington and West ( 2001 ) in their survey about Australian companies clearly suggested the high quality of EVA compared to net incomes and other accounting public presentation steps in explicating stock returns.

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 indicate 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 ) .

The consequences of comparative 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.Many other surveies reported the weak correlativity of residuary income based prosodies with stockholders value as measured by stock returns. Like, Peterson and Peterson ( 1996 ) provided grounds that EVA and other valued based type steps do non supply much more information than stock monetary values. Stark and Thomas ( 1998 ) examined the UK market and concluded that the relationship between residuary income ( RI ) and market value is by no agencies perfect.

Goetzmann and Garstka ( 1999 ) in their survey that long-run endurance of companies may be related to accounting net incomes, and more, simple EPS does every bit good or better than EVA at explicating differences across companies and at foretelling future public presentation.

3. Datas and Methodology

3.1 Sample subdivisionOur sample period spans 08 old ages, from 2000 to 2007.

Sample size consist of 76 companies from India and listed on Bombay Stock Exchange ( BSE ) . The selected companies are from fabricating sector ( as defined by Business Beacon -CMIE database ) and taken from BT-500 companies ( 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. Initially 104 companies ( Kaur and Narang, 2009 ) with full EVA information from 2000-2007 were identified from the BT- 500 companies. Then, we excluded 28 houses which are non covered in fabricating companies as per CMIE database. So, a concluding sample of 76 companies with full informations from 2000-2007 are included organizing 608 firm- old ages observations.3.

2 Variables and informations beginningThe chief aim of the survey is to analyze the comparative and information content of EVA and traditional public presentation steps. To accomplish this, Market Value Added ( MVA ) is defined as the value added in surplus of economic capital employed and used as dependent variable. In order to cipher the economic capital we made certain accommodations as proposed by Stern- Stewart & A ; company. These include non- repeating gains/losses, capitalized R & A ; D disbursals etc. Along with MVA, EVA, NOPAT, OCF, RONW, ROCE and EPS are used as independent variables. The principle for choice of these variables is that the same are used by bulk of the research workers all over the universe.

Datas used in the present survey is taken from Capitaline database and informations related to EVA is taken from the survey conducted by Kaur and Narang, 2009.3.3 Hypothesis of the surveyWe examined the utility of assorted public presentation steps in footings of their ability to explicate the fluctuation in the stockholders value. Based on the aim of the survey, following hypotheses are formulated: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 more information content beyond the NOPAT, RONW, ROCE, EPS and OCF in explicating market value of houses.

4. The Model Specification

In order to analyze the comparative information content and incremental information content of assorted public presentation steps, we used two degree of analysis: Factor analysis ( Principal constituent analysis ) and pooled arrested development ( OLS ) .

Chief constituent ( PCA ) involves the computation of the Eigen value decomposition of a information covariance matrix or remarkable value decomposition of a information matrix, normally after average focus oning the information for each property. The consequences of a PCA are normally discussed in footings of constituent tonss and burdens ( Shaw, 2003 ) .Although, basic application of PCA is ( 1 ) to acquire a little set of variables from a big set of variables ( most of which are correlated to each other ) and ( 2 ) to make indexes with variables that measure similar things ( conceptually ) but the basic intent of application of PCA in the present paper is to happen out the figure of factor we can include for OLS arrested development analysis. The variables with negative burden are discarded from the analysis and excluded from the theoretical account formation. In 2nd measure, we used univariate and multivariate arrested development ( OLS ) to prove the comparative information content and to happen out the relationship of assorted public presentation steps with Market value added ( MVA ) . More specifically following arrested development theoretical accounts are used in the present survey.

Univariate Regression Models: To prove the Relative Information content of each variablesMVAit =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?1OCFit + Iµit aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ . ( 5 )Multiple Regression Models: To Test the Incremental information content of EVA and traditional fiscal public presentation stepsMVAit =I?0 + I?1NOPATit+ I?2ROCEit+ I?3 RONWit + I?4 OCFit + Iµitaˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ ( 6 )MVAit =I?0 + I?1EVAit+ I?2 NOPATit + I?3 ROCEit + I?4 RONWit + I?5 OCFit + Iµitaˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ ( 7 )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 ; 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¦.

76 and t= 1, aˆ¦aˆ¦8.

5. Consequences and Analysis

5.1 Sample adequateness and cogency trialUndertaking a good factor analysis relies on the sample adequateness and cogency. A really of import cogency trial standard for factor analysis is the Kaiser-Meyer Olkin – KMO ( after Kaiser, 1974 ) .

This standard is used to mensurate the sample adequateness by comparing the magnitude of the ascertained partial correlativity coefficients to those of the magnitude of the partial correlativity coefficients. Kaiser ( 1974 ) suggested that each property must hold a high KMO coefficient mark as this improves the value of each single property. Harmonizing to Kaiser ( 1974 ) ; Bryman and Cramer ( 1999 ) a KMO value under 0.50 is perceived as being unequal and hence unacceptable.

The value of KMO statistics of our sample as shown in Table I, KMO = .579, which is above the specification of 0.50. Further, Bartlet trial of Sphericity for adequateness ( strength of the relationship among variables ) of correlativity matrix is important as the value is 0.000 which is less than 0.

05 uncovering that correlativity matrix is non an individuality matrix. So, the consequences of KMO and Bartlett ‘s trial reveal that our sample is fit for factor analysis.

Table: I Results of KMO and Bartlett ‘s trial

Kaiser-Meyer-Olkin Measure of Sampling Adequacy.

.579Bartlett ‘s Test of SphericityApprox. Chi-Square507.

149df21Sig..0005.2 Descriptive Statisticss and Correlation MatrixPanel A of Table II provides the descriptive statistics of variables used in the survey. It is clear from the tabular array that RONW ( 12.

17809 ) and ROCE ( 17.19 ) have the lowest standard divergence standard divergence among the independent variables, followed by EPS ( 53.32057 ) and EVA ( 241.82620 ) .

MVA, NOPAT and OCF reveal the highest standard divergence. Average statistics show that MVA, NOPAT and OCF are negative. Negative MVA implies that most of the sample companies are destructing value as against the value creative activity for stockholders.

Highest average value of EVA ( 39.3640 ) implies that most of the sample companies are adding value to stockholders ‘ wealth.

Table II: Descriptive Statisticss

Panel A: Descriptive Statisticss















Panel B: Correlation Matrix













Note: – ** , * . Correlation is important at the 0.01 and 0.05 degree.

5.3 Principal Component Analysis

The purpose of chief constituent analysis is the building of a set of variables “ Xi ” s ( i= 1,2aˆ¦..

k ) , of a new set of variables ( Pi ) called chief constituents, which are additive combinations of the “ Ten ” s. These combinations are chosen so that the chief constituents satisfy two conditions ( Gupta and Gangadhar, 2004 ) :the chief constituents are extraneous to each other, andthe first chief constituent histories for the highest proportion of entire fluctuation in the set of all “ X ” s, the 2nd chief constituent histories for the 2nd highest proportion and so on.By using six independent variables ( NOPAT, ROCE, RONW, EPS, OCF and EVA ) to PCA we get per centum discrepancy with regard to Principal Components ( Personal computer ) as mentioned in Table-III. Choosing merely top 3 Personal computers with Eigen values more than 1, which for giving about 89 % of the discrepancy explained, there burdens are considered for happening the influence of the variable.

Table III. Results of PCA demoing Personal computers with Eigen values and matching discrepancy





% Discrepancy






0060.10100.0The burdens obtained for different Chief constituents are given in Figure 1 to 3 ( see Annexure-I ) . The values of single burdens of different Personal computers are besides shown in Table IV.

The sum entire values of different variables shows that EPS has negative influence as we are choosing merely 3 Personal computers with Eigen value of greater than 1 for our analysis. Table V summarizers the burden of different variables as per precedence for farther analysis and we found the variables like NOPAT, OCF, RONW, ROCE and EVA has maximal influence, whereas EPS have negative burden. Therefore, EPS is discarded for farther analysis.

Table IV.

Loads of different variables for top 3 Personal computers







Table V. Loadings of different variables as per precedence






5.4 Consequences of Regression Analysis

In Table VI, we report the consequences of comparative information content trial. The appraisal is made by analysing univariate arrested development consequences of independent variables i.e. EVA, NOPAT, ROCE, RONW and OCF. Gaining per portion ( EPS ) as discussed above is non included for arrested development analysis. Consequences are estimated on the footing of arrested development equations ( 1 ) to ( 5 ) . In order to prove the incremental information content of public presentation step, we compared the alteration in the value of adjusted R2 from arrested development theoretical account 6 to 7.

Before analyzing the arrested development consequences we besides test the first order consecutive correlativity and multicollinearity in our informations. Consecutive correlativity was analyzed by analyzing the Durbin-Watson ( D-W ) statistics. Since our maximal value of D-W statistics was found to be 1.935 which is in scope ( 1.

5-2.00 ) bespeaking no possible autocorrelation. In order to look into the independency of the forecaster variables ( independent ) , Variance Inflation factors ( VIF ) was analyzed.

We found 3.81 as the highest value of VIF about EPS and thereby reasoning no colineraity in the informations. Following are the some of the of import observations from the OLS arrested development theoretical accounts: -From the comparative information content trial, we found that NOPAT and OCF outperform EVA as coefficient of finding ( R2 ) about EVA is 15.4 per centum as compared to 22.5 per centum and 17.5 per centum for NOPAT and OCF severally.

This means that traditional public presentation steps explain better in the fluctuation in MVA of the sample companies. Regression consequences further reveals that all the single coefficients ( I? ) are important as t- statistics are important at 0.05 degree of significance.

So, our hypothesis ( H1 ) that comparative information content of EVA is superior to traditional steps is rejected and thereby reasoning that traditional corporate public presentation steps are better index of alterations in market value of Indian Companies.Our consequences about comparative information content trial are consistent with bulk of international surveies such as ( Chen and Dodd, 1997 ; Biddle et al. , 1998 ; Ray, 2001 ; Worthington & A ; West, 2001 ; Peixoto, 2002 ; deWet, 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 ) .Our consequences about Incremental information content trial reveal that EVA add fringy ( .

009 ) in explicating the market value of the house as compared to without sing EVA. OCF and ROCE exhibit negative relationship with MVA of the sample companies. Overall theoretical account consequences ( as revealed by F statistics ) are important with statistically important P value ( .000 ) .

Therefore our 2nd hypothesis ( H2 ) that EVA adds more information content to that provided by NOPAT, RONW, ROCE, EPS and OCF in explicating market value of houses is rejected.Further arrested development consequences reveals that merely 35 ( adj. R2 ) per centum of fluctuation in MVA is explained by the arrested development theoretical account go forthing bulk unexplained. It means that apart from these fiscal variables one should see non fiscal variables like client satisfaction, merchandise quality to capture the exact fluctuation in MVA of the sample companiesOverall, our consequences failed to back up the Stern- Stewart hypothesis that EVA is a better public presentation steps. Traditional public presentation steps such as NOPAT, OCF are better than EVA. On the line of Chen and Dodd ( 2001 ) and Ismail ( 2008 ) we besides feel that one should see non -financial variables to capture the alterations in market value of the company.

Table Six: Arrested development Consequences of Relative Information Content

Rank order of R2

( 1 )

( 2 )

( 3 )

( 4 )

( 5 )

All houses


& gt ;


& gt ;


& gt ;


& gt ;


R2 ( per centum )22.517.515.

47.85.30Adj. R2 ( per centum )21.516.414.36.64.

00Coefficients.573 ( 4.637 ) *0.519 ( 3.961 ) *0.408 ( 3.

670 ) *0.269 ( 2.508 ) **0.22 ( 2.

037 ) **P-value0.0000.0000.

0000.0140.045F21.497*15.689*13.470*6.288*4.148Note: – * , ** coefficients are statistically important at 0.

01 and 0.05 severally degree of significance.

Table Seven: Test Results of Incremental Information Content

Independent variables

Model 1Model 2RONW.209 ( .917 ).

170 ( .735 )NOPAT3.301 ( 3.929 ) *2.760 ( 2.770 ) **ROCE-.072 ( -.321 )-.

082 ( -.367 )OCF-2.851 ( -3.309 ) *-2.307 ( -2.270 ) **EVA

.137 ( 2.

449 ) **R2.379.388Adjusted R2.344.

345F-value10.850*8.885*a?† R2


9351.875Notes: 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 ; OCF- runing hard currency flows ; t-statistics are provided in parenthesis ; * , **statistically important at 1 and 5 per centum degree severally.


Reasoning Remarks

The basic aim of this survey is to analyze the claim of EVA advocates about its high quality over traditional public presentation steps in explicating the fluctuation in the stockholders ‘ value in Indian market and supply empirical grounds. Using informations set of 76 Indian fabrication companies for clip span from 2000-2007, we test the relation and incremental information content trial of EVA and conventional public presentation steps. We used two measure methodological analysiss, i.e. factor analysis and OLS arrested development. The basic principle of utilizing factor analysis was to find the figure of factors that we can utilize for farther analysis.

Chief component analysis ( PCA ) , popular signifier of factor analysis was used and ensue about PCA reveal that since Gaining per portion ( EPS ) has negative value for factor lading so can be discarded for arrested development analysis. The arrested development consequences about comparative information content trial reveal that NOPAT and OCF outperform EVA and thereby rejecting the hypothesis that EVA has better explanatory power than conventional public presentation steps. Our incremental information content trial farther reveals that EVA makes merely fringy part and has no important impact on the alterations in the market value of the sample companies. The comparatively low explanatory power of all public presentation steps under scrutiny is mostly consistent with the consequences of many international surveies ( see Chen and Dodd, 1997, 2001 ; Biddle et al. , 1997 ; Maditinos, 2009 ) .The consequence of the present survey support the claims of many research workers that more fiscal and non- fiscal determiners should be employed to measure the value of the house. We have identified following countries for future research to analyze the relevancy of assorted corporate public presentation steps in explicating the market value of Indian companies:To prove the informations utilizing alternate dependent variables ( such as stock returns ) with same or big informations set of similar or more clip span. Many international surveies have used stock returns alternatively of MVA to analyze the value relevancy of assorted public presentation steps.

To prove the incremental information content of constituents of EVA ( such as Adjusted NOPAT, Cost of Capital, Economic capital and Accounting accommodations ) with similar or big informations set.To analyze the value relevancy of fiscal and banking establishments and do comparing with consequences of other sectors.

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Annexure- I Factor Loading of Principal constituents ( Personal computers )

Figure. 1. Loads of PC-1

Figure 2. Loads of PC-2

Figure 3. Loads of PC-3