Examining Association Of Vaic And Eva With Mva Accounting Essay


An economic system success and growing chiefly depends on the suited and instantaneous operation of the banking system. Components of rational capital i.e. human capital and client capital are widely present in the banking sector ( Kamath, 2007 ) . These are really of import factors for the smooth and successful working of the Bankss. Different research workers are interested in mensurating rational capital and hence assorted theoretical accounts are developed to mensurate it. Value Added Intellectual Co-efficient ( VAIC ) and Economic Value Added ( EVA ) are two theoretical accounts which are mostly used by the research workers. EVA is the method used for the rating of the stockholders wealth earned by the organisation. Higher EVA means the company is gaining more value for the invested money by them. VAIC theoretical account is used for the measuring of rational capital in the organisation. It is the value added by the presence of the rational capital in the organisation. With the turning concern about measuring and fiscal coverage of rational capital in the organisations, the inquiry arises whether rational capital has important association with the economic value added and market value added of the organisations. Market Value Added ( MVA ) is the market invested capital subtracted from market value of the organisation. If the MVA of the company is greater than zero so the company is bring forthing returns more than the capital invested. Market Value Added ( MVA ) is supposed to reflect the rational capital and economic value added by the Bankss. The present paper is an effort to show a comparative analysis of VAIC, EVA and MVA of Indian banking industry.

Reappraisal of Literature

For the expedience of the bookmans engaged in the field, the paper divides the study of literature into two cardinal parts. Those researches who have contributed to the measuring of rational capital by using value added rational co-efficient ( VAIC ) and those who have measured economic value added ( EVA ) . Both these theoretical accounts are used to mensurate rational capital in the organisations but so far no such detailed survey has been carried out to measure the association between these two theoretical accounts.

A little figure of research workers have tried to capture the disclosing forms of rational capital in different states. Evaluation and proper measuring of rational capital requires appropriate methods. Goh & A ; Lim ( 2004 ) conducted the survey to measure qualitative and quantitative information disclosed by the Malayan companies. The survey found that revelation about the rational capital of the companies was more of qualitative mode than the quantitative mode. Assorted theoretical accounts were developed for mensurating it but Bontis et Al. ( 1999 ) analyzed that none of the theoretical account can be considered best as each theoretical account have its ain standards for mensurating rational capital. Bozzolan, Favotto & A ; Ricceri ( 2003 ) conducted the survey to measure the revelation form of rational capital of Italian companies. The consequences of survey concluded that revelation of rational capital was chiefly related with external capital of the companies. Industry and size of the companies were two of import factors impacting the unwraping form of the companies. Other research workers investigated the relationship between the rational capital and concern public presentation of the companies in different states. Zeghal & A ; Maahoul ( 2010 ) carried out survey in UK on 300 houses and found a positive relationship between rational capital and houses ‘ economic and fiscal public presentation. Zerenler, Hasilogu & A ; Sezgin ( 2008 ) analyzed rational capital influence over advanced public presentation of Turkish houses and found a positive association between them. Tan, Plowman & A ; Hancock ( 2007 ) investigated and found positive relationship between rational capital and future fiscal public presentation in Singapore companies. Chen, Cheng & A ; Hwang ( 2005 ) evaluated the relationship between rational capital and market rating of Chinese companies. Many similar surveies were carried out to look into the relationship between rational capital and houses ‘ fiscal public presentation by Kamath ( 2008 ) on pharmaceutical industry in India, Gan & A ; Saleh ( 2008 ) in Bursa Malaysia and Firer & A ; Stainbank ( 2003 ) in 65 South African companies listed on the Johannesburg Securities Exchange ( JSE ) .

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EVA is yet another method used for the rating of rational capital in the companies. But this method is non a direct method for mensurating rational capital. Calculation of EVA requires many accommodations of the accounting entries, as it is different from the accounting value added of the companies. Both these measurement tools of rational capital are used in the paper in effort to happen out any association between the VAIC and EVA of the companies.

Bontis et Al. ( 1999 ) argued even if EVA did non associate to the intangible assets but its direction can better the EVA of the houses. Abdeen & A ; Haight ( 2001 ) studied Economic Value Added with the intent concentrating on advantages and the restrictions of the theoretical account. The survey is based on a sample of Fortune 500 corporations with a clip period of 1997 and 1998. Consequences of the survey found that the EVA users were better performing artists than non-users in instance of grosss, assets and shareholders ‘ equity.

Palliam ( 2006 ) evaluated the relationship between the Economic Value Added and stock returns and house values. A sum of 108 companies with 33 non-EVA users and 75-EVA users were taken as sample. The survey found that EVA method was no better than other available prosodies used for the measurings of stockholders value. The survey besides analyzed that there were no association between the stockholders return and companies ‘ EVA.

Maditions, Sevic & A ; Therious ( 2009 ) used Easton and Harris formal rating theoretical account to measure the public presentation steps. The chief intent of the survey was to compare valued based public presentation measured by Economic Value Added ( EVA ) and Shareholder Value Added ( SVA ) with traditional steps as Net incomes Per Share ( EPS ) , Return on Investment ( ROI ) , and Return on Equity ( ROE ) for the analysis of the stock market returns. The survey was based on the Athens Stock Exchange with a clip period of 1999-2001. Consequences found the association between the stock market returns with Earning Per Share ( EPS ) instead than EVA.

Paulo ( 2010 ) examined EVA theoretical account as superior theoretical account in comparing to other fiscal public presentation prosodies. The association between EVA and MVA was besides analyzed. It was concluded that EVA method still did non formalize to be the appropriate step for run intoing the corporate end for the UK Companies Act, 2006.

Sharma, Hui & A ; Tan ( 2007 ) conducted a instance survey in the New Development Company Ltd. ( NWDC ) based in Hong Kong SAR for the analysis of the cognition direction plan. The paper analyzed that EVA method was a better placeholder for the measuring of the rational capital. Popa, Mihailescu & A ; Caragea ( 2009 ) evaluated EVA theoretical account in the Roman Bankss as the public presentation index. Findingss of the paper evaluated that EVA could be used as the tool for the betterment the fiscal public presentation of the Bankss and could be used by the direction for taking determinations.

Jones ( 2006 ) compared the deliberate beta of the companies provided by the Stern Stewart & A ; Company ‘s one-year EVA scoreboard with the estimated beta. A sample of 399 companies was taken for a period of 1995 to 2001. There was important difference between the deliberate beta coefficient and the market calculated beta. The consequences besides highlighted that market beta was well higher than the expected EVA value of the companies. Geyser & A ; Liebenberg ( 2003 ) examined the EVA method in the South African agricultural concern and co-operatives. Consequences of the survey analyzed that EVA was a value heightening technique for the agribusiness co-operatives.

Dagogo & A ; Ollor ( 2009 ) analyzed the usage of venture capital in little and average graduated table endeavors in Nigeria. A comparing of EVA was made between the venture capital backed SME ‘s with that of non-venture capital backed SMEs. Variables used for the survey were equity finance, direction support and proficient support. From consequences it was analyzed that venture capital backed SMEs were supplying more grosss to the authorities and carry throughing their societal duties. There was a important difference between EVA of venture capital backed SMEs and non-venture capital backed SMEs for the debt equity and therefore these SMEs grew more in comparing with others.

2.1 Research spreads indentified

As from the reappraisal of literature above, rational capital and its measuring and direction has been the country of involvement of corporate universe from the past few decennaries. But there is no understanding among research workers and academicians about any individual coverage and measuring theoretical account for the rational capital. EVA and VAICTM being two theoretical accounts, used individually but until now no survey tried to measure association between them every bit far as known. This paper tries to analyse associate if any between the two theoretical accounts and Market Value Added ( MVA ) of the Indian Bankss.

Research Aims and Methodology

For the intent of this paper, 30 seven Bankss are taken. These Bankss are divided into two major classs of private and public sector Bankss. Data is obtained from the database of Centre for Monitoring Indian Economy ( CMIE ) called Prowess. However, the present survey is limited to merely three factors i.e. VAIC, EVA and MVA and more factors could be considered for broadening the skyline of such survey in future.

3.1 Aims of the survey

The chief aim of the present paper is to analyze the association and inter-relationship among the theoretical accounts of rational capital i.e. Value Added Intellectual Co-efficient ( VAIC ) , Economic Value Added ( EVA ) and Market Value Added ( MVA ) of the selected Bankss for the clip period of 10 old ages from 1999-2000 to 2008-2009.

3.2 Hypothesis of the survey

The undermentioned hypotheses have been formulated for this survey:

H01: there is no association between the rational capital measured by Value Added Intellectual Co-efficient ( VAICTM ) and the Economic Value Added ( EVA ) of the Bankss for the clip period 1999-2000 to 2008-2009.

H02: there is no association between the rational capital measured by Value Added Intellectual Co-efficient ( VAICTM ) and the Market Value Added ( MVA ) of the Bankss for the clip period 1999-2000 to 2008-2009.

H03: there is no association between the Economic Value Added ( EVA ) and Market Value Added ( MVA ) of the Bankss for the clip period 1999-2000 to 2008-2009.

3.3 Measurement of Value Added Intellectual Co-efficient ( VAICTM )

VAICTM theoretical account is used to mensurate the rational capital of the companies. As computation of VAIC is based on the audited histories of the companies, it is considered as dependable step. It is the difference of input and end product of the companies.

VA = OUTPUT – Input signal

Value added can be calculated as follows:

VA= I + DP + D + T + M + R

Where I stand for involvement disbursals, DP represents depreciation disbursals ; D is used for dividends paid, T represents corporate revenue enhancement, M is the equity of minority stockholders and R is the maintained net incomes.

Value Added Intellectual Co-efficient ( VAIC ) can be divided into three constituents viz. Capital Employed Efficiency ( CEE ) , Human Capital Efficiency ( HCE ) and Structural Capital Efficiency ( SCE ) . VAIC is calculated as follows:


For the intent of this survey, value added as suggested by Chen, Cheng & A ; Hwang ( 2005 ) is calculated in the undermentioned mode:

VA = W + I + T + NI


W = rewards of the employees

I = Interest

T = Taxes

NI = Profits after revenue enhancements



CEE = Capital Employed Efficiency

VA = Value added

CE = Capital employed taken as net worth of the company.



HCE = Human Capital Efficiency

VA = Value added

HC = Total of rewards and wages of the employees.

SC = VA – HC



SCE = Structural capital efficiency and

SC = Structural capital

Economic Value Added ( EVA )

Economic Value Added ( EVA ) was developed by Joel Stern and G. Bennet Stewart in 1989. It was antecedently used by the comptroller as the term residuary income of the organisations. So, many of the research workers do non see it as a new theoretical account. But the term being comparatively new and involves a complex procedure in its computation. EVA can be calculated by the undermentioned method.



NOPAT = Net Operating Net incomes After Tax

WACC = Weighted Average Cost of Capital

IC = Invested Capital

Calculation of EVA has to be done after doing accommodations because without these accommodations it is non an economic term but an accounting term. In ciphering EVA, following accommodations have to be made

Loan loss proviso and Loan loss modesty


Restructuring charges

Security accounting

General hazard modesty

Research and Development ( R & A ; D ) costs and preparation costs

Operating rental disbursals

Cost of Debt ( Kd ) has been computed as:

Kd =

While ciphering get downing adoptions, all sedimentations every bit good as long term adoption has to be included as all debt ( sedimentations and adoptions ) are involvements bearing. Therefore, involvement paid in the fiscal twelvemonth has been considered as a entire involvement disbursals.

Cost of equity ( Ke ) is calculated by utilizing Capital Assets Pricing Model ( CAPM ) . Harmonizing to this theoretical account, Ke is the stockholder expected return and this expected return ( Rj ) is as follows:

Rj = Rf + ( Rm – Releasing factor ) I?i


Rf = Risk free rate of return

Rm = Market rate of return, and

I?i = Sensitivity of the portion monetary value in relation to market return.

Risk free rate of return is taken by the placeholder of 364 yearss Treasury measure rate of return ( T-bill ) . For the computation of market rate of returns day-to-day Bankss index shuting monetary value of twelvemonth to twelvemonth footing is taken. Bank index is calculated by utilizing 30 Bankss from 1996 to 2007. Closing monetary value is used after doing accommodations for fillip, dividend and right issue.

The day-to-day market return has been calculated by taking logarithm of monetary values alternatively of:


Rt = Daily bank Index return

Pt = Current Index shutting monetary value

Pt-1 = Previous twenty-four hours shutting monetary value.

The I?i coefficient in the standard arrested development equation ( referred as to beta in this instance ) measures the sensitiveness of dependent variable to per unit alteration in independent variable.

For the intent of determining the cost of equity, the single bank equity portion monetary value has been taken as the dependant variable and the return on the market ( computed as day-to-day return of bank index ) has been taken as the independent variable. To happen out receptivity of single bank ‘s equity return ( taken as placeholder for the cost of equity ) to the market rate of return, the Beta co-efficient has been calculated as follows:


I?i = The beta of the security in the inquiry,

COVim = Covariance between return of the bank equity and market return of the bank index,

= Variance of the market return.

Mathematically Stewart presented EVA theoretical account as:

EVAt = NOPATt – ( WACCt * ICt-1 )


NOPAT = Net operating net income after revenue enhancement

= Net incomes before involvement and revenue enhancement * ( 1 – corporate Tax rate )

WACC = Weighted mean cost of capital

IC = Invested capital

NOPAT is calculated as per the Calabrese ( 1999 ) . Rakshit ( 2006 ) carried out a instance survey of Dabur India Limited and found that EVA is a new technique and should be used in taking assorted determinations.

Market Value Added ( MVA )

The term Market Value Added ( MVA ) tells the market value created by the company.

Market Value Added ( MVA )

= Market Value of Stock – Equity capital Supplied by stockholders.

= ( Current Market Price ) A- ( No. of Share outstanding ) – Entire Common Equity.

Consequences and Analysis

Figure 1.1 shows selected Indian Bankss divided into public and private sectors. Table 1.1 shows the Value Added Intellectual Co-efficient ( VAIC ) with their mean and standard divergence. Mean of the VAIC in the twelvemonth 2000 is 8.50 which keep on increasing till the twelvemonth 2002 and starts worsening thenceforth till the twelvemonth 2006 and increased after it. The mean of VAIC is highest in the twelvemonth 2009 which is 11.55. The consequence depicts that mean of the VAIC in the selected period is from 7.22 to 11.55 which indicate that Bankss are using their rational capital to a good extent.

Table 1.2 shows the Economic Value Added ( EVA ) of the selected Bankss. From the tabular array, it can be analyzed that EVA of the Bankss in the clip period from 2000 to 2009 shows an increasing tendency. It is lowest in the twelvemonth 2000 ( i.e. 950.25 ) and highest in the twelvemonth 2009 ( i.e. 3615.77 ) . Mean EVA of the Bankss indicated that stockholders value is progressively added by the Bankss.

Libenberg ( 2004 ) carried out a survey to cipher EVA of South African agricultural houses and found that the selected companies were non adding value to the members ‘ involvement. In add-on, no correlativity was found between EVA public presentation of the houses and single groups of the co-operatives in the survey period. Iseri & A ; Kayakutlu ( 2006 ) analyzed in Istanbul Stock Exchange that richest rational capital retail companies were found to hold highest EVA but the consequences was non generalized because survey was based on a little sample size.

Table 1.3 shows the average value of Market Value Added ( MVA ) . MVA of the Bankss shows increasing tendency from the twelvemonth 2000 to 2008 and declined in the twelvemonth 2009 ( from 12295.65 in the twelvemonth 2008 to 9119.47 in the twelvemonth 2009 ) . Overall market value of the Bankss has increased in the given period.

Figure 1.1: Shows the selected Bankss used in the survey.

For the intent of look intoing association between these variables, Pearson correlativity is used. The consequences ( Table 1.4 ) show that association between the EVA and VAIC is non found to be important in given period. The association between MVA and EVA is 41.1 to 89.3 % and important in all nine instances except in the twelvemonth 2003. No correlativity is found between VAIC and MVA in the given period. By the usage of Shapiro-Wilk Test for normalcy informations are analyzed and found to be non-normal. So, outliers are removed to hold consistence in the consequences. Data is made normal by taking base 10 logarithms and opposite of the informations.

Table 1.5 shows the consequences of the multiple arrested development of dependant and independent variables. Consequences of the multiple arrested development highlight that independent variables i.e. EVA and VAIC explain 24.6 % to 67.6 % of the dependant variables which is besides important at 5 % and 1 % degree of significance. The theoretical account is important in all ten old ages at 1 % and 5 % degree of significance. Form the consequences it can be concluded that Value Added Intellectual Co-efficient ( VAIC ) used to mensurate rational capital efficiencies explains merely 29.5 to 37.5 % of the variables and important at 5 and 10 % degree of significance. Economic Value Added ( EVA ) explains 48 to 83.5 % of the variables and important at 5 % to 1 % degree of significance.

Findingss and Decision

From the predating treatment, it may be concluded that rational capital is associated with the market rating of the Bankss. Intellectual capital that is measured by both Value Added Intellectual Co-efficient ( VAICTM ) and Economic Value Added ( EVA ) is found to be associated with the Market Value Added ( MVA ) of the Bankss. EVA is more closely associated and it means that economic value added may be considered as the better use of rational capital of the Bankss. Contrary to our consequences, Kyriazis & A ; Anastassis ( 2007 ) found that there was no stronger correlativity between EVA and MVA of the Grecian companies but on the other manus, Kramer & A ; Peters ( 2001 ) analyzed that EVA should be considered as a better placeholder for the MVA in comparing to net operating net income after revenue enhancement ( NOPAT ) . It can be summarized that economic rating of the Indian Bankss is considered as indispensable yardstick by the investors as market ratings may reflect important association among economic value added and market value added of the Bankss. Since market rating is considered as right ever, hence, EVA may try to be the close placeholder of MVA as evidenced in the analysis of this survey.