CHAPTER ONE – INTRODUCTION
As of late, financial shareholders and investors have turned out to be progressively worried about the wealth of actual investor that is made by an organization. A few organizations, for example, Enron, have demonstrated a total absence of concern for the investor as of late by settling on transient choices that don’t concentrate on the creation of wealth. Since organizations increase a large portion of their capital through ventures of different people and different organizations, it is the organization’s obligation to give a satisfactory and good degree of profitability to investors by settling on insightful long term choices. In any case, most organizations are utilizing conventional gauges for estimating the value which fails to quantify the real wealth creation of investor.in regard to this, Stewart (2006) made a standard known as “Economic Value Added”, which, as indicated by Stewart, is the foremost standard for estimating the production of investor wealth. This thesis research looks at the importance of Economic value added (EVA) and corporate performance.
The purpose of starting a business is to increase wealth. In this process, the owner will invest a lot of money to develop the company in the early stage. The value of this behavior lies in the company’s desirable future rewards for the owner, including cash from dividend allocation and equity resale. Lazonick and O’sullivan (2000) used a ten-year historical analysis of the value of U.S. stocks to show how U.S. companies use shareholder value maximization to govern their companies. In the course of the gradual change of the strategy of American enterprises, the article shows that the enterprises have changed from the retention of earnings to the reinvestment after the development of enterprises.
Therefore, maximizing shareholder value is one of the important financial management objectives of enterprises. In detail, shareholders ‘wealth is acquired through dividends and capital appreciation. Tortella and Brusco, 2003) .After capital appreciation, the resale of equity will yield more return than the original investment capital. The increase of shareholder capital comes from the increase of stock market value. The rise and fall of stock prices are related to internal and external market factors. Therefore, on the premise that enterprises are allowed to publish information, the stakeholders of enterprises will use financial information to assess the actual profits of the company and predict its future profitability (Banerjee, 2000).
EVA adoption as an inner controls standard, notwithstanding the utilization of guidelines, would form a motivation and an effectual device for corporate administration. EVA is “a measure of residual income, which spotlights on the idea that an organization must earn a sufficient risk adjusted profit on its investment on assets” (Tortella and Brusco, 2013). The motivation behind EVA is to report more than earnings per shares figure by assessing the sufficiency of earnings a company have created in contrast with the capital it has utilized to arrive at that position. EVA is useful in light of the fact that “the essential financial target of apy organization ought to be to boost the wealth of its investors” (Stewart, 2006).
Easton and Ohlson (1992) saw that EVA is an irrefutable mainstream measure of corporate performance one that is frequently utilised by corporations for assessing performance, yet in addition as a ground for determining motivator pay. Like other performance measures, EVA tends to accommodate the fundamental force that exists between the need to think of a performance measure that is exceedingly co-related with the wealth of shareholders, and yet to some level less subject to the stock prices irregular variances. This is a challenging strain to ascertain and it elucidate the relatively low correlations of all accounting founded measures of performance with stock profits at any rate for a year to year premise. Tortella and Brusco (2013) has extended that selection of the EVA framework by an ever increasing number of organizations all through the world plainly portrays that it gives an incorporated choice – causing structure, can change energies and divert assets to make economic incentive for organizations, clients, workers, investors and for the board.
EVA likewise looks to assess the return investors are getting contrasted with what they ought to get by tolerating the involved risk. Basically, EVA = NOPAT – (Capital x Cost of Capital). Another equation for computing EVA is (NOPAT – WACC) x Operating Assets in Place. NOPAT is the net working income after taxes; WACC is the weighted average cost of capital; and Operating assets in place “represents the measure of capital allocated into the organization’s current operating assets” (Kramer and Peters, 2001).
Taking NOPAT, EPS, ROI and ROE as examples, these traditional financial indicators do not fully take into account the capital cost in the calculation process, so using accounting profit as a predictive indicator of enterprise value will lead to the difference between the actual value and the evaluation of enterprise performance. (Kumar and Sharma, 2011) Therefore, Stern Stewart Company (1991) of the United States first proposed using EVA instead of traditional financial indicators to measure external performance and internal performance. They believe that incomes and earnings per share will lead to misguided performance evaluation, and in fact the most appropriate measure should be EVA. Stewart (1994) also used data from other companies to prove the hypothesis of the value advantage of EVA. In the article, he quantifies EVA and other accounting measures and compares them together to explain the change of shareholders ‘wealth. He finds that EVA sis 50% higher than other accounting measures. Later, in 2005, Ehrbar and Stewart (1999) collaborated to report that more than 300 companies in Europe, Asia and Latin America had changed their strategies and used Stewart’s EVA structure. For example, IBM, Dell,Coca-Cola, General Motors, American Express, Sony, Wal-Mart, Siemens and other large global listed companies. Ehrbar and Stewart also highlighted the case of Federal-Mogul, an auto parts manufacturer. EVA not only helps enterprises improve operational efficiency, but also changes the organizational framework of the company. Two larger business units are combined to form a center of interest. This proves the synergy of EVA among units.
In a recently conducted research, Chen and Dodd (2001) contrasted EVA and Residual earnings and Operating earnings to perceive how they are identified with value and which one was the foremost decision. In this examination, the researchers noticed a few organizations have expressed that the reception of EVA has prompted an increment in stock prices. Of these organizations, Coca Cola expressed that its stock expanded over two hundred percent from 1987, the year it embraced EVA, and 1993. Be that as it may, when thinking about the help for this, the investigation demonstrates that there isn’t sufficient data to influence that EVA is a predominant type of valuation.
This examination additionally demonstrates that while EVA improvement is related to the high stock value, the quality of that affiliation is a lot more fragile than advocates of EVA guarantee it to be. The investigation specifies, Basic accounting profit is of critical gradual data in addition to measures of EVA and essentially that EVA is exactly practically identical to residuals earnings, a generally old managerial accounting construct . The examination proceeds by demonstrating one significant contrast between EVA and income: EVA incorporates the both equity capital and debt capital total cost where financing incorporates just debt capital interests costs. The examination closes, “Since accounting profit disregard equity capital, they are inadequate proportions of economics reality”.
The investigation by Zora and Gokerb (2014) analyzed a portion of the cases of Economic Value Added by tending to further EVA’s alleged potential benefit of dispensing with deformation of GAAP . The model utilized in the examination is that some may contend that development and research cost ought to be promoted since it will carry future advantages to the organization. As indicated by GAAP, development and research must be expensed in the incurred period. As indicated by the examination, this could contort both the accounting and capital profit of the organization. When taking a gander at Economic Value Added case of prevalence over accounting profit, the investigation states, “Even with all the hypothetical points of interest and anecdotal proof, the predominance of EVA over accounting income is as yet an empirical question” (Zora, I. and Gokerb, 2014). The investigation likewise takes note of that “operating income measures give more data in clarifying the variety of stock return than lingering pay measures, which in tum contain more data than Economic Value Added measures” (Chen and Dodd, 2001). When taking a gander at the merits and demerits of every one of the three estimates considered, Zora, I. and Gokerb (2014) note that residual income contains notable data that operating income doesn’t contain. The investigation closes by expressing that “counting both the debt cost and equity in profitability measure is by all financing a promising practice as far as expanding value pertinence. This offers help for one of the EVA focal points vigorously acclaimed in the business press”.
The examination directed by Chen and Dodd (2001) demonstrated that EVA isn’t overwhelming to the stock cost and return, yet is captious in regard to the fact that it incorporates both the expense of obligation and value as far as estimating esteem. The data contained in the examination likewise prompts the determination of utilizing EVA as an extra apparatus instead of a substitution device since it includes a few advantages however does not really have prevalence over different estimates, for example, accounting income. Note that one reason EVA isn’t prevalent is that it is still established in conventional accounting information. In another examination directed by three teachers from west coast colleges, the study showed that “despite the fact that for certain organizations EVA might be a successful instrument for interior basic leadership, performance measure, and motivation remuneration, it doesn’t rule income in its relation with securities exchange returns for the example firms and period considered” (Tortella and Brusco, 2003).
EVA refines residual income by including acclimations to the divisional budgetary presentation measure for bends presented by GAAP. It is utilized for the most part in organizations with divisions and is inferred by beginning with divisional benefits, give or take bookkeeping changes, less an expense of capital charge on divisional controllable resources. The divisional benefit ought to be determined before notional intrigue charges. Different alterations are made to supplant notable bookkeeping sections with a sum that approximates financial benefit and resource esteems. 160 potential alterations can be made; however, most associations should make in any event ten modifications, for instance, the capitalization of numerous optional costs, for example, innovative work (R&D), promoting and publicizing to guarantee that expenses and advantages coordinate. These changes are made to determine administrative data closer to financial reality (Correira et al. 2007; Drury 2007).This paper mainly studies the role of EVA and financial performance in evaluating corporate performance, especially the value relevance of EVA to traditional indicators.
1.1 Research Objective
The main purpose of this research is to establish the relation between EVA and the financial market and evaluating corporate performance.
1.2 Outline of the Approach
The population of the study comprised listed corporations in the New York Stock exchange. This study adopted quantitative research design. Data for the analysis were obtained from secondary sources which included financial records of the companies. Data was analyzed utilizing SPSS and a regression model was developed to incorporate study variables.
2.0 The Origin and Concept of EVA
The concept of economic added value studied in this paper originates from residual income. Palliam (2005) put forward a theory that the amount of the cost of equity and debt capital must be less than the profit of an enterprise. After that, in 1879, Marshall put forward the definition of economic profit in the relevant theoretical research. He believes that if an enterprise wants to succeed in the long run, it must be able to compensate both operating costs and capital costs in its income. Economic profits require the cost of all factors of production to be deducted from the enterprise. Schumpeter (2017) followed by an in-depth analysis of economic profits. It is defined as the difference between the net assets at the end of the period and the net assets at the beginning of the period after excluding the factors of owner’s input and distribution. And he put forward that economic profit is to measure the residual income that the profit produced by invested capital exceeds the cost of capital from an economic point of view. But Chen and Dodd (1997) emphasize that the concept of residual income and economic profit are basically the same, but they are not the same. Surplus profit will vary because of the different methods of validating the value of income and equity investment capital.
In the early 1990s, American Stern and amp; Steward Company put forward a set of financial management system based on economic added value. This system also includes enterprise management decision-making system, incentive compensation system and financial performance evaluation index analysis. In order to remedy the shortcomings of traditional financial indicators, enterprises hope to use EVA to precisely mirror the value made by the organization for investors. EVA is the contrast between the networking benefit after tax and the expense of capital input required to generate these profits for a certain period of time. (Stewart, 1991) The company’s economic added value is to measure the net return on capital costs. Capital cost includes debt capital cost and equity capital cost.
Worthington and West (2001) explains that EVA is a new version of residual income. EVA is a residual income in a particular application. This particular application refers to accounting adjustment. EVA believes that GAAP cannot fully reflect the investment and income situation of enterprises. (Fernandez, 2001) Based on this use of EVA, more than 150 projects requiring accounting adjustments were detailed. However, Singh and Mehta (2012) discussed the problems in the calculation formula of EVA. The conclusion is that too much adjustment cost is not conducive to the wide use of EVA. The best way is to adjust about five to ten items. On the other hand, it is a theoretical analysis of the effectiveness of EVA and its advantages and limitations. It is agreed that EVA is more accurate than traditional indicators in evaluating business performance.
Lovata and Costigan (2002) seen that “EVA is an essential modern management instrument that has increased developing universal acknowledgment as the standard of corporate administration. It fills in as the focal point of a totally coordinated system of monetary administration and impetus remuneration.” basically, EVA is a path both to legitimize and to systematize the running of a business as per fundamental microeconomics and corporate account standards. The experience of an extensive rundown of receiving organizations all through the world emphatically underpins the thought that an EVA framework, by giving such a coordinated basic leadership structure, can refocus energies and divert assets to make supportable incentive for organizations’ clients, workers, and investors and for management.
As the development of economic profit and surplus income, EVA and capital cost are closely related. The most important thing in its concept is to consider the cost of capital. This is also the biggest difference and advantage between EVA and traditional accounting performance indicators. Thus, Burksaitiene (2009) also made two predictions. Firstly, when the owner of an enterprise has complete decision-making information, the optimal capital cost should be higher than that of the principal when the agent is motivated by residual income, which can reduce the overinvestment of the agent. Another is that when there is no pre-decision information, the optimal capital cost should be smaller than the principal’s capital cost to reduce the agent’s underinvestment behavior.
2.1 Theoretical framework of EVA
This concept can also reflect the goal consistency of EVA. When the interests of both owners and agents are linked to the cost of capital, the conflicts of interests between them will be reduced, so that both agents and owners work for the overall objectives of the company. This is explained in detail in Shimin Chen and James L. Dodd (2003). Lokanandha’s research results published in 2006 also show that EVA can reduce the interest friction between managers and shareholders to some extent, although it cannot make them completely on the same front.
In addition, some scholars have established models to prove the role of EVA. Anctil, Jordan and Mukherji, (1998) used a single-period model to focus on the relationship between company decision-making and revenue in a period. The research shows that the optimal investment decision can occur when the short-term residual income is maximized. And this decision-making advantage will be reflected in the company’s production level can achieve the optimal level in the long run. In addition, Dutta and Reichelstein (2002) proved that this relative return reduces the agent’s information rent by using capital cost as internal revenue through a multi-stage principal-agent model. This residual income performance index evaluation system also benefits from the consistency of objectives.
Farsio, Degel and Degner, (2000) proposed three ways to improve EVA. Firstly, we can increase operating income by more effective operation of prevailing company and capital; secondly, we can invest in projects whose expected return exceeds the cost of capital; thirdly, we can accelerate capital return by selling assets that are more valuable to others or by improving the productivity of capital utilization, such as speeding up the operation of liquidity. In 1994, Stewart also found that EVA can provide a management framework to redistribute resources for companies, thereby creating longer-term benefits. Singh and Garg (2004) gave a more detailed explanation of the reasons for the advantages. He believes that five factors are the key to creating value: net after-tax profit before deducting financing cost after tax, competitive advantage period, and return on investment, business investment and WACC.
Lehn and Makhija (1997) explained the difference between EVA and accounting profit. The difference between them is that EVA is a residual profit after deducting all capital costs comprising equity. Accounting profit neglects the cost of equity capital. Using a sample of 452 companies from 1985 to 1994, the author draws a conclusion that the association between EVA and stock price performance is stronger than other indicators of accounting such as ROE and ROA. It is also pointed out that EVA is a more efficient CEO mobility index than traditional management methods. Therefore, economic added value is an estimate of real economic profits.
Researchers and managers have been endeavoring to gauge association’s an incentive by different execution estimates both conventional bookkeeping measures and money related proportions. Abused execution measures have colossal shrouded costs. Conventional execution measures neglect to join the expense of capital utilized and thus need suitability to quantify association’s money related execution. The observational writing to date shows that there is no single bookkeeping based measure which can be depended upon to clarify changes in investor wealth. Should such a measure occur it would demonstrate significant to the different gatherings keen on parts of organization execution (Worthington and West, 2001). This prompted the improvement of a money related execution lattice that defeats the constraint of ordinary execution measures and spotlights on evident worth included/wrecked by the association. Biddle et al. (1998) spearheaded the idea of monetary benefit, communicated regarding genuine benefits other than different working expense and cost of contributed capital.
As a beginning stage its designer and chief supporter, USA based business specialists Stern Stewart and Co. (from this point forward alluded to as Stern Stewart) contend: “profit, income per offer, and income development are misdirecting proportions of corporate execution, the best pragmatic intermittent execution measure is EVA”. It is the money related execution measure that comes nearer than some other to catch the genuine financial benefit of an endeavor and is straightforwardly connected to the making of investor wealth after some time. Monetary revealing has been condemned for low-quality and absence of significance in the present data rich condition. Across the board enthusiasm for returning to the nature of money related revealing proposes that options in contrast to right now ordered execution measures ought to be assessed for worth importance. EVA is determined in the wake of deducting the expense of value capital and obligation from the working benefits. It is a reexamined rendition of Residual Income (RI) with a distinction in the manner monetary benefit and the financial capital is determined. It depends on the importance of monetary benefit by thinking about the expense of contributed capital (value and obligation) which was not considered in conventional methodology (Ehrbar, 1999).
In view of the inadequacy of GAAP in depicting an organization’s genuine money related position (O’Hanlon and Peasnell, 1998), Stewart proposes up to 164 changes in accordance with recover the genuine image of an association’s budgetary exhibition (Stewart, 1991). These changes are expected to take out financing mutilations in an organization’s NOPAT and capital, some bookkeeping things, for example, costs for research and item advancement, rebuilding charges, and showcasing expenses are viewed as additional as capital speculations rather than costs (O’Hanlon and Peasnell,1998). Comprising of somewhere in the range of 120 to 150 potential modifications, these progressions are made based on both observational and hypothetical concerns. To start with, it is contended that changes in accordance with bookkeeping numbers are required all together “, to accomplish higher relationships between the transient measure (for this situation EVA), and offer costs, which thusly can prompt increasingly harmonious objectives for divisional chiefs and investors just as a progressively dependable marker of corporate execution for security examiners and portfolio supervisors (Forker and Powell,2008). Second, at its root is the contention that not exclusively are bookkeeping profit a wrong intermediary for worth creation, however that administrators who are assessed and remunerated based on income “,may take activities that expansion profit yet annihilate worth, or neglect to take activities that may lessen income yet make value” (Forker and Powell,, 2008).
Forker and Powell, (2008) reasons that EVA figure is nearer to money streams and in this way less subject to the bends of gathering bookkeeping; expelling the self-assertive qualification between interests in unmistakable resources, which are promoted, and elusive resources, which will in general be discounted as brought about; bring shaky sheet obligation into the monetary records and right inclinations brought about by bookkeeping devaluation. To process EVA, Stern Stewart changes the NOPAT and capital sections of lingering salary for “bookkeeping irregularities” or “twists”. A portion of their increasingly regular modifications fix conventional bookkeeping collections, (for example, disposing of conceded expense bookkeeping for genuine money assessments paid). Different changes switch gathering strategies (for example from LIFO to FIFO). Still others present new accumulations not utilized in customary GAAP-based accounting.
2.2 Advantages of EVA
EVA guides firms and managers to effectiveness, basically an objective of utilizing EVA is to make the firm achieve more (financially) with as meager capital as fundamental (Alam and Nizamuddin, 2012). Productivity isn’t the primary worry of EVA, yet EVA can indicate what “value” was produced using what capital was utilized; along these lines it can pass judgment on proficiency (Mäkeläinen, Dillon and Owers, 2001). Cash isn’t free, so it ought to be utilized so that would amplify its arrival, or if nothing else pays for the expense of utilizing it (Alam and Nizamuddin, 2012). This is a “principal idea” of EVA, to get more for less .Since the “cost of assets” utilized is the intrigue, the lower the cost of the assets the better and progressively alluring the obtained assets .
The ramifications of this proficiency that EVA advances are the thing that its advocates accept is another significant motivation behind why EVA ought to supplant EPS. Stewart accepts that a strategy of having administrators meet yearly spending plans isn’t as functional as having them be estimated by EVA, which would give a more noteworthy motivation to execution (Stewart, p. 5). Stewart astutely calls attention to that something other than monetary honors are important to get outstanding money related execution from chiefs; supervisors need to need to succeed.
Stewart proposes that a firm puts together its chiefs’ motivation with respect to a balanced level of EVA, recommending that they ought to get a segment of the genuine worth they help to make. Utilization of this technique would not restrict directors to a specific reward run (like a greater part of American organizations do), so the sky is basically the breaking point to the worth they can make and after that profit by. The leaders will probably make the organization progressively beneficial and proficient without bringing about any more costs that are not (at any rate) secured by the expanding benefits – they are not to hurt the organization by expanding its obligation without having the new benefits pay for it .Under this framework, the more effective and worth upgraded the firm turns into, the higher an administrator’s motivation (reward remuneration) moves toward becoming (Stwart,1991). Improvement in EVA (and in this manner the company’s value) is the objective that the administrator’s target, bringing about the development of an association’s worth Stewart trusts in a free enterprise approach, enabling an administrator to do what he sees fit (clearly inside moral measures) to build the organization’s worth (Stewart, 1991).
Another advantage of EVA is that its pertinence is practically widespread. Its least difficult application requires just two of the most ordinarily utilized fiscal summaries; the monetary record and the pay articulation, enabling it to be connected to for all intents and purposes any organization with precise budget summaries (Rago, 2008). The standards of Economic Value Added are likewise generally easy to comprehend (Rago, 2008).The way that the standards of EVA (effectiveness, expanding wealth) can be effectively passed on to other people, including workers, gives them a shared objective that they can plainly add to and acknowledge (Rago, 2008). While the hypothesis basic EVA and its application can be mind boggling, the essential focuses it represents advance to sound judgment. EVA can likewise be utilized as a sort of symptomatic instrument, demonstrating administrators which areas of the firm need more work to build a company’s an incentive for the following time frame (Rago, 2008).
2.3 Disadvantages of EVA
A main shortcoming is the topic of the widespread reasonableness of EVA. Some recommend that EVA isn’t the best decision for all organizations. These specialists accept that EVA is progressively fit to set up organizations “with couple of prerequisites for capital consumptions” likely on the grounds that capital is a central point in the EVA condition .Such specialists accept that EVA isn’t appropriate for “organizations that are delicate to the accessibility of capita instead, they may improve to utilize CVA” .Those acquainted with the two measurements will see that the recipe for CVA (money worth included) is based on basically a similar head as EVA.
Another potential deficit Brewer records is that since the count of EVA relies upon the budget reports dependent on bookkeeping standards, bookkeepers can change components somewhat to change the subsequent EVA figure. Models he records incorporate moving the satisfaction of requests in or out of a “bookkeeping period” to move the incomes recorded in or out, and moving costs in a like way. In any case, one may take note of that an appropriately balanced EVA metric will consider such changes (Green, Jackson and Aikens, 2008).
One more ruin is the thing that Brewer considers to be a shallow way to deal with what has all the earmarks of being in his article R&D costs. He voices the assessment of the individuals who accept that EVA and comparable measurements brief directors to roll out positive improvements for right now and present advantages without in regards to so much the tasks that give returns later on .It is in the creator of this current paper’s conclusion, however, that a chief who genuinely pays special mind to the prosperity of his organization will verify both present and future returns, yet will simply put a littler need on the present returns, wanting a safe future for the organization(Elali,2007).
Stewart additionally introduces a sort of answer as he continued looking for Value. He says that an arrangement wherein a reward is granted to a director who meets an objective and is constrained by a reward top (or as such that the supervisor’s extra falls inside a high/low go) can be frightful to an organization in both all kinds of challenges. Stewart says that having such an arrangement will just inspire supervisors to give better execution during great occasions, when achievement is feasible and directors are inside the high/low go. Be that as it may, when directors understand that they won’t probably meet their objective, or when they are at the highest point of the range and won’t be compensated for any further achievement, they will have considerably less motivating force to add to the prosperity of the firm .This is as opposed to his arrangement, which provides impetus for times of less worth included (when future returns have not yet been acknowledged), enough maybe to hold a decent administrator over until the accomplishment of things to come task is clear.
The last defeat that Brewer notices is the thing that he calls the issue of “results direction”. By this he implies that EVA is certifiably not an extremely supportive analytic device to “point towards the underlying drivers of operational wasteful aspects”. Thusly, he accept that with regards to strategizing about the following term, EVA will offer little help and direction toward improving worth .Others accept that the inverse is valid and that EVA can indicate chiefs what should be adjusted to expand an incentive for the following financial term (Rago, 2008).
2.4 EVA and ROA
ROA is one of the most significant profitability proportions and shows the performance of the management with respect to association’s assets and resources determined by partitioning net benefit by absolute resources. Figuring bookkeeping benefit considering the value instability may settle on troublesome basic leadership for association’s presentation assessment. Hence, ongoing year’s economy circumstance has changed administration execution estimation assessment. One of the performances of the management estimation assessment is ROA (Laing and Dunbar, 2015).
ROA assesses company’s capacity in benefit making as per all out interests in resources. The other one is EVA, measures firms’ real return and shows capital return level in the wake of financing costs. Nakhaei (2016) examined association’s exhibition estimation in India by utilizing money related data of 6 years. The aftereffects of the investigation demonstrate that EVA is a more appropriate prescient proportion of market an incentive than other customary bookkeeping measures. Worthington and West (2004) investigating the data substance of EVA, lingering salary (RI) and income before unprecedented things locate that stock return changes and profit before remarkable things have more data content than others.
Fernandez and Reinoso (2003) examined the connection among EVA and investors made investor value and presumed that EVA cannot quantify shareholder value. Kangarloei et al.(2012) in their examination titled the effect of profit for resources and profit for value and financial influence on stocks cost of the organizations recorded in TSE demonstrated that arrival on resources and rate of return have more precise consistency than income. The outcomes additionally propose that arrival on resources and rate of profitability impact on stocks cost. Kangarloei,et al(2012) researched the relationship between’s EVA to capital proportion and market worth included (MVA) to capital proportion in TSE showing that EVA has no need than other customary proportions.
Nakhaei et al. (2013) demonstrate that refined monetary value and working capital flows have not risen to relationship with market value. Yahyazadeh et al. (2010) examined the connection among EVA and benefit proportions with MVA in TSE. Their outcomes demonstrate that there is a huge connection among EVA and rate of profitability proportion and return and MVA. Be that as it may, they found no proof recommending the importance connection among ROA and income per share (EPS) and MVA. Joibary (2011) demonstrate a connection between EVA, MVA, and budgetary factors, nonetheless, the connection among EVA and money related factors is more than MVA.
Young et al. (2010), in his article he expressed that the utilization of EVA as a corporate presentation estimation instrument. His primary research finding was that, inside the setting of the JSE (Johannesburg Stock Exchange), EVA is best case scenario hardly superior to measures, for example, ROA and ROE.
Bontis et al (2007) found that EVA idea may have everlastingly changed the manner in which genuine gainfulness is estimated. EVA is a monetary instrument that spotlights on the distinction between organization’s after duty working benefit and its absolute expense of capital. Lee and Kim, (2009) in their investigation dependent on the information of 241 US firms point towards the applied predominance of EVA over the customary proportions of monetary execution. The investigation recommends that EVA is better than bookkeeping benefits as a proportion of significant worth creation since it perceives the expense of capital and, subsequently, the peril of an association’s tasks. As far as the effect that proportions of monetary execution have on the stock costs EVA has been observed to be generally noteworthy.
2.5 EVA and ROE
Jensen and Heckling (1999) guarantee that, despite the fact that numerous organizations use ROE, it is vulnerable to control when directors have rights to settle on choices over the degree of venture. They perceive the utilization of EVA; however plainly demonstrate that it is likewise not the best measure. This is on the grounds that activities with negative EVA in early years won’t be picked if directors are assessed on current EVA figures, despite the fact that the future yearly EVA is sufficient to legitimize the venture. ROE is as yet utilized broadly for estimating organization execution. Be that as it may, Black et al. (2001) found that it isn’t predictable with the making of investor value. The primary hindrance of ROE is that it is influenced by an organization’s equipping levels. Outfitting and resource turnover can impact the ROE with the goal that higher equipping and higher resource turnover, which are not really helpful, can make ROE be higher.
Thomas and Lipson, as referred to by Black et al. (2001), found through their exploration as far back as the 1980s that the coefficient of assurance (r2 ) of ROE to showcase/book proportions was 19 percent, which demonstrated that adjustments in market to book proportions can’t be dependably clarified by ROE. Be that as it may, Black et al. (2001) found that ROE was as yet a key measure, as the idea of investor worth strengthens the message that profits on contributed capital (value) must be improved and cost of capital must be diminished. Dark et al. (2001) announced that despite the fact that some Japanese organizations have understood the inadequacies of utilizing ROE to quantify investor wealth, most still accept that ROE is the best marker of investor value. One organization that does not trust in the utilization of ROE is the Japanese firm ‘Hoya’. They adjusted EVA to suit their particular needs and call it investor worth included (SVA). Notwithstanding, they do accept that augmenting SVA on the long run will likewise expand ROE. Their sentiment is that their SVA measure and ROE are not conflicting, yet rather correlative. Stewart III (2003) from Stern Stewart and Co guarantees that the primary driver for issues in worth estimation lies in that that bookkeeping has moved toward becoming “unhinged” from worth. bookkeeping has turned into an apparatus to make profit reports look better. It has the impact that bookkeeping measures can’t be depended upon for worth estimation.
Another issue that Stewart III (2003) recognizes is explicitly identified with the utilization of ROE for estimating value. ROE overlooks the expense of value while value is anything but a free asset and has a cost equivalent to the intrigue charged on obligation. That prompts organizations frequently announcing benefits while they are truly not making value or notwithstanding devastating worth. That is the reason the idea of financial benefit or leftover worth supposedly is a superior measure. Its count is as per the following: Economic benefit = Accounting benefit – Cost of value. A case of a firm that focused its emphasis on income and ROE is Enron (Stewart III, 2003). The administration of Enron was obviously so centered around profit per share (EPS) and ROE that they began to utilize obligation to an enormous degree. Influence expanded amazingly, yet at the same time the chiefs did not have any desire to take advantage of value markets to diminish money related pressure, apprehensive that it will adverse effect income figures. Nonetheless, positive profit figures did not make an incentive for investors and did not keep the organization from going down.
2.6 EVA and Leverage
Financial leverage refers to the degree to which the firm relies on debt (De Wet and Hall, 2004). Alcock et al. (2013) examined the relationship between leverage and value taking a sample of 293 US companies over a period of 2006-2011. While using ordinary least squares regression they found negative effect of debt on value. But when used simultaneous equation model taking into account all the rest mechanisms, the role of debt as a disciplining device disappeared. Wet and Hall (2004) illustrated that the impact of enormous financial leverage was offset by EVA.
El-Sayed Ebaid (2009) found that leverage has a negative significant effect on the firm’s performance using accounting and market measures of performance. Beard and Dess, (2011) examined the impact of financial leverage on shareholders’ return and market capitalization of automotive cluster companies of Pithampur, India. The study revealed that there was no significant influence of financial leverage on shareholders’ return and market capitalization. Shamaileh and Khanfar (2014) taking a sample of 30 firms of Bangladesh, analyzed the relationship between debt ratio and EPS as proxy measures of leverage and shareholders’ return respectively. The study revealed that leverage had statistically significant effect on shareholder’s wealth.
Hasan and Gupta (2013) examined the relationship between debt ratio, taken as a proxy of financial leverage, and profitability in the context of tourism companies of Jordan. They concluded that financial leverage had statistically significant effect on profitability of tourism companies listed in the Amman Exchange. Cheng and zeng (2014) found a negative relationship between leverage and stock return. Nourish and Alfred (2014) analyzed the relationship between EVA and MVA and leverage and MVA in the context of select private banks of Sri Lanka. They found that EVA and leverage did not have a significant impact on MVA.
Acheampong et al. (2014) found that leverage was positively associated to the value of the firm up to the point where the firm issues enough debt to attain its maximum capital structure. Vijayalakshmi and Manoharan (2015) studied the impact of corporate leverage on EVA and MVA using a sample of seven companies listed on both National Stock Exchange and Bombay Stock Exchange. They found that leverage had significant impact on MVA and EVA of the select companies. Saretto and Tookes (2013) investigated the relationship between “leverage and market value” and return on stock and economic value added”. They concluded that effect of market value and leverage on stock returns was significant. They implied that as the leverage increases dependable with the market value, returns on the stock added by 43.09%.
2.7 Analysis of Predecessors, Economic Value Added and Financial Markets
As indicated by the hypothetical connection between the EVA and stock costs and incomes, the high EVA produced by the office expands its worth, and hence is reflected in the high costs of the portions of these set up organizations. As the instance of the legitimacy of these claims, the hypothetical organization of venture portfolios contains the portions of endeavors with high EVA, so we should accomplish phenomenal returns contrasted with all the normal market profits and returns for portfolios that contain the portions of undertakings with low EVA.
There are numerous examinations centered around testing causality among costs and profit markers of EVA and the rest of the salary and bookkeeping pointers perceived as needy factors. One of the main examinations around there has focused on the testing the connection between the EVA everything being equal and the estimation of the substance. The investigation tried whether the information value included and value parts of this assistance clarify the stock returns and changes in the estimation of the organizations more information from the bookkeeping benefits or not. As per the yields of the examination can be said that the benefit bookkeeping helped in translating the profits stocks superior to every one of the information leftover pay and the EVA, additionally the outcomes demonstrate that benefits add to the elucidation of bookkeeping income and the stock estimation of the business more prominent than other monetary scales, so this alludes to the worthlessness corrections proposed by Stern Stewart and Co. Biddle et al. (1997) tried the equivalent previous connections in the period following the presence of an article (Tully 1993), which brought up that the utilization of standard worth included financial is the genuine key to making the abundance of investors, and demonstrated that they have highly affected the prevalence of the idea of EVA measure. Research was centered around causality by utilizing the 606 view results and was demonstrated no help to the hypothesis that the charges allude to the prevalence measure that the EVA over the Metrology bookkeeping in the translation of changes in stock costs.
O’Byrne (1996) tried the connection between stock returns and between both the EVA and networking benefit after duty bookkeeping. In light of the investigations the bookkeeping benefits added to the understanding of the stock come back to a lesser degree than the EVA, however that the distinction between the scales isn’t a factor (estate arrived at 33% of the connection between stock return and EVA). The examination presumed that these scales show raising the commitment of standard EVA in the elucidation of stock returns for conventional bookkeeping scales. This investigation was scrutinized in light of the fact that alterations were done when testing the size of the financial worth and he didn’t make similar modifications for an examination of the connection between returns offers and benefit bookkeeping.
Bernstein and Pigler (1997) tried the probability of utilizing information with the EVA in the structure of venture portfolios that look for ordinary returns, and that through the arrangement of speculation portfolios dependent on the information, the EVA of the offers and exchange approaches depends on purchasing high-value stocks and selling stocks with a low EVA. The examination called attention to that in the event that we accept the hypothetical legitimacy of the case that organizations that accomplish high EVA guarantee to raise the abundance of investors, the sythesis of venture portfolios containing organizations that accomplish high EVA is required to get high pace of return contrasted and the normal returns in the financial exchange. What’s more, the normal yield that is conceivable to be accomplished by utilizing the venture strategies depends on surely understood bookkeeping pointers. The investigation of the arrangement of portfolios among the enlisted organizations in the New York market was secured by the S and P 500 list for the period from 1987 to 1997. The examination’s outcomes demonstrated that as opposed to charges, the utilization of hypothetical measures for the EVA as a reason for the choice of business premises inside the portfolio did not make any bizarre return. In view of the aftereffects of past examinations and the business enlisted in the securities exchanges, unmistakably a significant part of the logical proof that demonstrates an absence of wellbeing (Almzagm hypothesis) supporting the prevalence of the proportion of EVA in clarifying the conduct of costs and profits of stocks for the markers of bookkeeping rehearses. As showed in the consequences of these investigations, corrections proposed by the Stern Stewart and Co. are not doable. On the bookkeeping figures to arrive at the EVA, saluting commitments to remaining salary determined legitimately from the bookkeeping figures distributed after the derivation of the expense of capital, communicates the adjustments in stock costs and returns more than the commitment of the EVA.
Griffith, (2004) affirmed that a positive EVA over some stretch of time will likewise have an expanding MVA while negative EVA will cut down MVA as the market loses trust in the skill of an organization to guarantee an attractive profit for the contributed capital. Kang et al. (2002) saw that “already we utilized a few estimations to measure our money related viewpoint from profit per offer to limited income and profit for normal resources. With EVA, I saw an approach to meet our business targets and make another corporate culture. It pervades each level from meeting room to the shop floor. Rewards of all supervisors are resolved exclusively by whether assortment accomplishes its Economic Value Added targets. At our organization each choice and each activity result from examination those utilizations Economic Value Added standards. We center on guaranteeing that each venture produces return that surpasses our expense of capital. We accept this methodology empowers us to straightforwardly adjust the executives and investors premium”.
Zora. and Gokerb (2014) in view of their examination on 80 Banking institutions for an annual time period established that the relationship of MVA with EVA is essentially higher than that with different estimates like EPS, ROE, ROA, and Net Income. Kocamis and Gungor (2018) finds that the degree of EVA clarifies 31% of the difference in the market value while the progressions in EVA clarify 55% of varieties in changes in market value. This illustrative intensity of EVA has been observed to be altogether higher than that of bookkeeping benefit (NOPAT). The most suitable measure is the arrival investors win through stock value thankfulness and profits more than a normal pace of return. Thenmozhi, (2010) has led an observational research to discover the prevalence of EVA over other customary money related execution measures. Return for capital invested and EVA have been determined for test organizations and a correlation of both demonstrating the prevalence of EVA over ROI.
Varshney et al. (2012) recommended that actualizing value included measures into an organization is an expensive and ideal strategy. Supporters legitimize the liberal costs and time by showing the upside of overhauling the association’s system for worth creation. A change to regard included estimations requires certified duty of the administering body and senior organization to use these measures to manage the business. Every individual in the association must get tied up with the game plan to make it powerful. It will in like manner require expansive planning and correspondence effort facilitated to everyone in the association. Everyone must be educated on the fundamental hypothesis basic the idea of making monetary worth. In any case, EVA “ought not be seen as the response to all things”. It doesn’t take care of business issues, which is the chief’s obligation ( Varshney et al. 2012).
Waruhiu, (2014) in their paper “Monetary worth included: some observational EVA dence” follow the development in the utilization of financial worth included (EVA, recently known as leftover salary) and utilizations two past research concentrates to survey a few cases for its benefits. Thinks about EVA’s capacity to clarify stock comes back with that of EBIT and income utilizing 1994‐2003 US information; and discovers EBIT is most firmly related. Looks at EVA’s impetus impacts on the board contributing, financing and working choices and demonstrates that, despite the fact that EVA clients diminished new venture, expanded demeanors of advantages, expanded offer repurchases, utilized resources all the more seriously and expanded leftover salary, showcase responses to this were feeble. Proposes potential explanations behind this and presumes that EVA may adjust the executives’ motivators to investors’ interests yet this does not really build investor value. Ethiraj (1998) determined those stock costs go up as an organization embraces EVA as an inward presentation rule.
Anand, Garg and Arora, (2009) surveyed top 90 organizations on EVA, Sales, PAT, and MVA criteria. The Examination has utilized the BS1000 rundown of organizations utilizing a whole file involving deals, benefit and exacerbated yearly development pace of those organizations during the period 1996-97. 60 organizations have been discovered ready to make positive Investor Value while 38 organizations have been found to annihilate it.
Hofmann, E. and Locker (2009), under took an investigation on title “Increasing the value of Money”. They had discussed that there are customary strategies to quantify company pay or known as bookkeeping idea and there is additionally a cutting edge technique to gauge corporate pay or known as monetary idea. Economic Value Added, which depends on monetary idea, is proclaimed to be a better strategy than recognize whether the association’s NOPAT during a period is covering its WACC and producing an incentive for its proprietors. In any case, it is extremely dubious to figure EVA..
Kirne et al. (2009) in light of his investigation on 9 chose undertaking in India for the period 2002-2011 discovered that out of the five independent factors Economic Value Added is the best of the part. In spite of the fact that Economic Value Added did not develop as the foremost indicator of investors’ wealth still Economic Value Added was the foremost logical variable in three out of nine chosen undertaking (Automobile, Drugs and Pharmaceuticals and Finished Steel). Rakshit (2006), under experienced an examination on title “Financial Value Added and Shareholder Wealth: An Empirical Study of Relationship”. They have completed an examination dependent on observational information. .Economic Value Added has demonstrated to be most illustrative variable, when MVA was taken as the needy variable and Backward Elimination technique was connected to locate the most logical free factor. For this reason, the time span was of eight years and every one of the factors were determined over this period for the example organizations. Rakshit (2006) uncovered that the Economic Value Added is emphatically and fundamentally associated with the corporations value.
Al Mamunet al. (2009) featured a few fictions with respect to Economic Value Added. As per him, Economic Value Added estimations aren’t basic and require a great deal of changes in the budgetary books. Further, Economic Value Added figures can be controlled to suit the necessities of the board. O’Hanlon and Peasnell, (1998) in their paper “Financial Value Added and Market Value Added: A straightforward variant and application “looks to improve EVA system’s application by proposing a rendition of Economic Value Added which grapples the open door cost of value capital on market instead of book values. The case for this is contended on general grounds and the subsequent model is helpful for looking at the potential impacts of the outfitting factor. The practicability of the model is shown by applying the proposed “Economic Value Added” equation to a blended arrangement of bookkeeping and securities exchange information from an example of UK organizations.
Yeniyurt, (2003) contrasted Economic Value Added and some other customary proportion of corporate execution viz. return for capital invested, ROCE, EPS,ROE,RONW and so forth. She has alluded to a portion of the inadequacies of the idea of Economic Value Added yet keep up that Economic Value Added is a superior proportion of corporate execution. Yeniyurt, (203) endeavored to see if Market Value of Firm if the capacity of Current Operational Value (COV) and Future Growth Value (FGV). In light of the investigation of his information he reaches the resolution that in many cased there was a significant disparity among MVA and the entirety of COV and FGV. Zimmerman (2011) In request to have a comprehension of how the conventional exhibition measures are equivalent to Economic Value Added, information of three money related a very long time somewhere in the range of 2006 and 2009 were browsed 28 organizations. Just 6 out of the 28 organizations have positive Economic Value Added while the others have negative. The Economic Value Added as a level of Capital Employed (EVA/CE) has been found to demonstrate the genuine profit for capital utilized. Contrasting Economic Value Added and other customary execution estimates the investigation shows that every one of the organizations portray a blushing picture as far as EPS, RONA and ROCE for all the three years. The examination demonstrates that the conventional measures don’t mirror the genuine estimation of investors and EVA must be estimated to have a thought regarding the investors value.
Goldberg (1999) saw that the lacking connection between Economic Value Added and improved financial is really lucrative. Economic Value Added can be an amazing asset. At the point when appropriately connected, it allows a corporation to learn where it’s making value and where isn’t . All the more implicitly it allows a corporation to realize where the arrival on its capital is surpassing the cost of that capital. For those regions of the corporation where the previous is in fact more noteworthy than the last Economic Value Added analysis at that point allows the corporation to center on the corporation’s efficiency so as to expand the value made of the corporations. At last, as speculators acquire more shares in the corporations so as to have more claims on its expanded worth, they consequently offer up and in the long run augment the organizations offer cost. What’s more, as any great industrialist knows, expansion of share cost is the name of the game in a free economy. From there on minimal increase in value included can be achieved by diminishing the organizations capital cost or by expanding its profitability. Riceman, (2002) contended that Economic Value Added is a presentation measure that is being utilized by an expanding number of organizations, yet scholastic research on EVA is restricted. Mangala, (2002) talked about the connection among Economic Value Added and Market Value among different organizations in India. The aftereffects of the investigation affirm stern’s speculation and reasoned that the organization’s present operation value was progressively huge in adding to alteration in market estimation of offer in the setting of India.
Yeniyurt(2003) uncovered that in a powerful domain, a typical financial specialist discovers it progressively hard to screen his speculations. EVA guides financial specialists in assessing the presentation of the organization and observing their speculations. Pablo, (2003) reasons that it is unimaginable for bookkeeping based measures, for example, EVA, EP or CVA to gauge value creation as these measures depend on bookkeeping data, which is notable in nature. NOPAT has been observed to have the most critical association with the MVA. The investigation likewise reasons that the association’s EP, CVA or EVA increment does not imply that the corporations is making value, as the investors value creation has almost no to do with Economic Value Added .
Stern and Joel, (2003) introduced the aftereffects of Stem Stewart exploration on organizations in India, which illustrate significant need to better the creation of wealth execution and designation of capital in the economy of India . They clarified how the powerful execution of the Economic Value Added structure could be an answer for location this issue. Terrance et al., (2003) in their paper “SMI and VMI programs: How financial worth included can help sell the change”, indicated significance of Economic Value Added in Supply Chain. SMI and VMI have developed as possible initial moves towards effectively incorporating exercises and data over different firms. In spite of the potential advantages, directors intrigued by these projects frequently can’t create the “buy‐in” among individual administration and administrators or amongst those in the communitarian firm. The obstructions come from a misconception of the ideas and a powerlessness to exhibit their potential impact on investor value crosswise over the two firms. This research draws a differentiation among VMI and SMI and distinguishes where the methodologies ought to be connected. A concurrent EVA investigation from the client and provider points of view is proposed as a way to exhibit the impact on investor value, measure execution, and defeat the impediments standing up to usage.
Balachandran, (2005) made an endeavor to read the worth made for the investors of the organization. They used to decide the connection between EVA and profit cashed to the investors. The investigation uncovered that the organization had used the profit paying asset furrowing once again into the business. The organization was extremely traditionalist in proclaiming profit and consistently had long haul target of making wealth to the investors, which has been accomplished. Lloyd, (2005) in his paper “Benchmarking to financial value included: The instance of Airways Corporation of New Zealand Limited”, depicts and examinations the selection of EVA income as a benchmark for setting estimating and different approaches of a state‐owned monopolistic endeavor without ordinary bench marking components. By gaining zero benefits of EVA of the venture wins its expense of capital and breaks cases of monopolistic estimating and conceivable guideline. To test the accomplishment of this strategy the budgetary arrangement of the venture are created from the period of fuse in the year 1989 alongside the EVA arrangement. The typical bookkeeping benefits are contrasted and the worth included outcomes. The value included outcomes are utilized as an intermediary for the evaluating and other choices of operations of the corporation that are not straightforwardly detectable. The legitimacy of the financial worth added way to deal with give a reasonable criterion is analyzed. Gives proof that the venture was fruitful in staying away from charging of monopoly valuing and consequent guideline by connecting estimating and different strategies to its monetary outcomes. This was in time when comparative undertakings were direct or undermined with guideline. The financial conditions in the later long stretches of the examination have emended the objectives of the venture.
Ali and Narges , (2006) experimentally checked on the pattern of Economic Value Added of Automobile Corporations in India. The outcomes show that there was a noteworthy expanding pattern in Economic Value Added during the time of study and the organizations in the car business are moving towards the improvement of their company’s worth. Lokanandha and Raghunatha, (2006) proposed that Economic Value Added should help diminish the distinction in light of a legitimate concern for the supervisors and investors, if not consummately adjust them. ‘enhancing Economic Value Added performance is related with a higher stock return. Anyway the relationship of EVA with return of stocks isn’t as solid as recommended in recounted Economic Value Added stories’ (Chen and Dodd 1997). Supervisors will act to investors’ greatest advantage just on the off chance that they have right impetuses. So it is fundamental to adjust the interests of the troughs and investors or possibly decrease the distinction between them.
Ralph Palliam, (2006) in his paper “Additional proof on the data substance of Economic Value Added” tests declarations that Economic Value Added is all the more exceptionally connected with stock returns and firm qualities than accumulation profit, and assesses which segments of EVA, add to these affiliations. Thirty three non EVA clients and 75 EVA clients were chosen indiscriminately. Factors utilized in this investigation were incomes, benefits, resources, investors’ value, advertise value, profit per share, complete come back to financial specialists, and rate cost decrease after some time. Information were gathered on a few measurements. The investigation recommends that the normal and broadly acknowledged measurements utilized by investigators and determined for EVA clients are not really better than that of non EVA clients. Ralph Palliam, (2006) in his investigation on data substance of EVA recommends that the normal and broadly acknowledged measurements utilized by investigators and determined for EVA clients are not really better than that of non-EVA clients. In view of the haphazardly chosen 108 example firms the examination reasons that EVA is to some degree invalid, temperamental, and faulty and raises genuine questions about the limit of EVA to convey prevalent outcomes.
Gianpaolo et al, (2014) in their investigation ‘Estimating value creation: Value Added Intellectual Coefficient and Economic Value Added”, Measuring Business Excellence’ proposes an examination between Value Added Intellectual Coefficient and one of the most significant presentation assessment strategies, the Economic Value Added, beginning from a reinterpretation of the Value Added Intellectual Coefficient. The experimental information were assembled from AMADEUS Bureau van Dijk and comprise of 2,596 organizations working in Northern Italy, from six diverse financial areas, watched for the year 2011. A connection examination was completed so as to feature whether there is a connection between the two ideas of Value Added Intellectual Coefficient and Economic Value Added. Results demonstrate that Economic Value Added and Value Added Intellectual Coefficient have no noteworthy connections; truly, EVA depends on monetary hypothesis, while Value Added Intellectual Coefficient is centered on the evaluation of ICE (Intellectual Capital Efficiency)
Anil Misra and Kanwal , Economic Value Added percentage is trailed by ROTA, which is marginally less noteworthy than Economic Value Added percentage in clarifying the varieties in the market estimation of firms’ offers. Economic Value Added (in total terms) and ROCE have been observed to be the 3rd and the 4th most critical factors individually in clarifying the variety in the offer costs. The consequences of the examination have set up the fundamental theory. Economic Value Added percentage has risen as the most noteworthy variable, superior to anything the customary measurements of budgetary execution in deciding the offer costs. Organizations that can enhance their Economic Value Added by either expanding their NOPAT or by chopping down their expense of capital through definitive proactive measures, for example, rebuilding of their capital will probably give a lift to their offer costs. If there should be an occurrence of such organizations that can’t either push their NOPAT or chop down their expense of capital yet are in a situation to keep up the spread between the two, the offer costs can be affected emphatically by implanting progressively capital into the business gave there is a possibility to expand the piece of the overall industry of such firm.
The empirical study was intended to establish the relation between the EVA and the financial market. The population of study is derived from the companies listed in the New York Stock Exchange. The companies are evaluated by the interested stakeholders such as investors who assess the performance and be able to determine investment decision as well as valuation model that would be crucial to the study.
3.1 The Research Design
The study design highlights the method used in collecting the data collection and describes the approach and method of data collection that will be significant for the analysis. The study utilizes the quantitative design. The quantitative research design is used to analyze how the study objectives will be met through analysis, measurement and evaluations. The quantitative methodology helps in the extraction of the information from the database set, sample utizing the method of statistics that will address the research problem
The population refers to the number of items that exhibit the similar features that is intended to study and draw inferences regarding the statistically issue. The research study focuses on the population of the 100 US companies trading in the five year period from 2014-2018 which is obtained from the financial statement.
3.3 Data Collection
The research utilizes the secondary information which was derived from the financial statement from 2014-2018 and the form 10k reports as well as the relevant documents Proxy reports, 10-Ks and all relevant documents which are accessed via the SEC research engine LIVEDGAR.
3.4 Data Analysis
The study utilizes the regression model by incorporating the variables. This means that EVA will be incorporated in determining the effect of the performance on it and incorporated on the regression model. The regression analysis is used to explain the relationship in which the coefficient of correlation is utilized to explain the relationship between the variables of the research.
3.4.1 Computation of EVA
The computation of the EVA involves the adjustment where the capital charge is deducted from the net operating profit after tax. The capital charge is obtained by multiplying the firm’s financing cost obtained from the weighted average cost of capital and the employed capital. The model was developed by Stewart (1991) and the economic value added used in assessment for the financial performance.
EVA = NOPAT – Weighted Average cost of Capital (WACC) x Capital employed.
NOPAT = Operating Income + Interest – Taxes. Weighted Average Cost of Capital (WACC).
WACC = [(Cost of Equity x weight of Equity in the capital structure) + (Cost of Debt x weight of debt in the capital structure) (1 – tax rate)
3.4.2 Test of Significance
The statistical test of significance such as T-test and F-Test were used to test the significance level. The F-test was utilized to test the significance of the model and whether the alternative or null hypothesis will be acceptable or not after being incorporated in the regression model. In the case the t-value is greater than 5, it remains significant at the 0.05 significance levels. Any value below the t-value will lead to rejection of null hypothesis depending on the direction either two or one-tail test.
3.5 Data Collection
The study utilizes the annual audited financial statement for the firms trading at the New York Stock Exchange (NYSE). The data for the study was collected by analyzing the vital information which was disclosed in the firm’s annual reports. The study employs the random stratified sampling techniques for the firm from each industry. The research uses the descriptive research with the sampling method with 100 observation incorporated in the regression analysis tools to test the hypothesis.
3.6 Sample and Sampling Technique
The sample size for the study examines the 100 companies trading in the NYSE. The random sampling technique was used in the selection of the sample to reduce the unbiased sample size that cannot be afforded by the member of the population and the data availability in meeting the required study objectives. The research reveals an extract of the financial statement for the firms for the period ending 2014-2018 based on ease and access to the annual reports.
The variables include the economic value addition as the major factor affecting the financial performance that affects the study. The EVA is a performance indicator that incorporates the company profits by determining the cost of capital invested. The financial statement used end at 31st December, 2014-2018 and not March 31 to influence the partial calculation of the financial computation.
3.6.2 Dependent variable
The financial performance is a measure of the financial ratio that measures the efficiency, liquidity and gearing ratio as well as the financial performance.
3.6.3. Independent variables
The independent variables utilized in the research include the economic value addition as an assessment tool that will be used to assess the financial performance.
3.6.4 Study Variables and Data
The component used in the analysis of the variables include the performance indicators such as profitability, liquidity and gearing levels as well as the strategies that will be obtained from secondary data which is extracted from the financial records of the 100 companies which are listed trading in the New York from 2014-2018.|The study shows the panel data analysis, which shows the random effect of the regression analysis using the SPSS V.21 statistical software.
3.7 Model Specification
The study delves on the influence of EVA On the company’s financial performance that are trading in New York Exchange trading from 2014-2018.The study uses the panel data as well as the cross section analysis whereas the multiple regression model was used to examine the influence based on the hypothetical relation that exist between the variables under the study.
The section renders the empirical results analysis of the study, of which 90 companies out of the listed company were obtained from the New York Security Exchange (NYSE). This represents 90 percent of the population. The chapter begins with a regression analysis to test the relation between EVA and financial performance. The model uses the financial performance to represent the independent variable, whereas economic value addition to represent the dependent variable. Additionally, the regression analysis was done to test the relation between the EVA and the financial performance using the SPSS program as the tool to analyze the data.
4.1 Diagnostic Tests
In research, a test of multicollinearity among independent variable is of high importance since the collinearity presence leads to increased errors in study outcome. Multicollinearity occurs when the independent variables, in the case of this study, ROA, ROE,liquidity and leverage, are correlated. As per Barnor (2014), he sated that, “if two or more independent variables are linearly dependent on each other, one of them should be included instead of both since it increases standard errors thereby making the results biased”.
A multicollinearity test was conducted on the data based on one of the basic assumptions that regressions should not be mutually correlated. The assumption was that, if more than one of the variables is correlated with others, then multicollinearity is said to be present.
This study employed the variance inflation factor (VIF) approach to test for multicollinearity. The rule of thumb under this method is that if the variance inflation factor of explanatory variables is above ten, then variables are said to be collinear. The variance inflation factor (VIF) results were as shown in Table 4.1. Outcomes in Table 4.1 shows that the explanatory variables are not collinear since the VIF for all the variables are below ten, meaning that multicollinearity does not occur between all explanatory variables in the study.
Table 4. 1: Multicollinearity Results for Independent Variables
In this research auto correlation was tested utilizing statistic of Durbin Watson. If the Durbin Watson value is less than 1.0 or greater than 3.0, there may be reasons for concern. As argued by Durbin-Watson, statistic is significant when it‘s closer to 2 (Gujarat, 2009). The auto-correlation results were as presented in table 4.2. Results in Table 4.2 indicted that Durbin Watson statistic was 1.408 and this was within the acceptable limits (Gujarat, 2009).
Table 4. 2: Autocorrelation Results for the Independent Variables
|Change Statistics R Square Change F Change||df1||df2||Sig. F Change||Durbin-Watson|
The study used the Shapiro-Wilk Tests to determine if the data used was normally distributed. Under the Shapiro-Wilk Test, the hypotheses are as follows:
H0: The observed distribution fits normal distribution.
H1: The observed distribution does not fit normal distribution.
If the Shapiro-Wilk test statistic is significant, then reject the null hypothesis; otherwise accept the alternative hypothesis that the data is non-normal. The results of the test are shown in Table 4.3. It was observed that in all cases, the Shapiro-Wilk Test statistic was significant at the 5% level, therefore the null hypothesis was rejected and it was affirmed that the data was not normally distributed. However, it was still considered reasonable and acceptable to work with the data for purposes of statistical interpretation. Similarly, Ahmed (1999) clarified that non-normality is not a problem if some of the variables are weakly exogenous. In order to remedy any possible effects of non-normality, the study used Generalized Least Squares to compute goodness of fit tests, parameter estimates, and standard errors for the overall regression model and the moderated regression model.
Table 4.3: Normality Test
|Year||Shapiro-Wilk Statistics df||Sig|
Descriptive statistics are basic features of data obtained in the study. This section presents secondary data descriptive statistics. Table 4.4 shows the descriptive statistics for variables used in the study.
Table 4.4: Descriptive Statistics
The results summarized in table 4.4 indicate that financial performance had a mean of 0.6471 and a standard deviation of 0.36432. EVA had a mean of 0.0088 and a standard deviation of 0.01902, ROA had a mean of 0.3456 and a standard deviation of 0.04311 while leverage had a mean of 0.5671 and a standard deviation of 0.00567 and ROE had a mean of 0.2312 and a standard deviation of 0.00367.
In statistic modeling, regression examination is a statstical procedure for assessing the connections among variables. It incorporates numerous strategies for modelling and analysis of a few variables, when the emphasis is on the connection between a dependent variable and at least one independent factor (or ‘predictors’). There are different suspicions for numerous linear regressions. First it needs the connection between the dependent and independent variables to be linear. Secondly the numerous linear regression examinations require all variables to be normal. Furthermore, numerous linear regression accept that there is almsost no multi-collinearity in the information
The outcomes exhibited in table 4.5 present the fitness of model utilized in the regression model to clarify the examination phenomena. EVA, ROA, ROE and leverage provide a moderately good fit in predicting changes in financial performance. This is supported by coefficient of determination also known as the R square of 45.1%. This means that EVA, ROA, ROE, liquidity and leverage explains45.1% of the variations in the dependent variable which is financial performance of companies listed in New York Stock Exchange. These outcomes additionally illustrate that the model used to associate the correlation of the variables was satisfactory.
|Adjusted R Squared||0.388|
|Std. Error of the Estimate||1.8597|
In statistics significant testing the p-value shows the degree of connection of the independent variable to the dependent variable. On the off chance that the significant number found is less than critical value otherwise called the probability value (p) which is set at 0.05 statistically, at that point the end would be that the model is significant in clarifying the association; otherwise the model would be viewed as non-significant.
Table below (4.6) gives the outcomes on the analysis of the variance (ANOVA). The outcomes show that the general model was measurably significant. Further, the outcomes suggest that the independent factors are great indicators of financial performance. This was bolstered by a F statistic of 7.181 and the revealed p value (0.000) which was not exactly the regular probability of 0.05significance level.
|Model||Sum of Squares||df||Mean Square||F||Sig.|
The investigation study analyzes the economic value added (EVA) and financial performance and the regression of coefficients are illustrated in table 4.7. To standardize the computations, the financial performance variables such as ROA, ROE, and LEV will be critical. The results show that there is a weaker negative correlation between the financial performance metrics such as ROE, ROA, but that of the Leverage and EVA, there exist a stronger negative relationship.
The coefficients, -0.125,-0.128,-0.674, and -0.211 shows the regression model is not sufficiently appropriate to estimate the financial performance for any given company. The value of R =0.015 that shows that 1.5 percent of the changes in the financial performance can be explained by the changes to the economic value added (EVA). This demonstrates that one cannot easily predict the financial performance by applying the economic value-added and therefore, no significant relationship exists between the financial performance and economic value-added.
Table 4.7: Model of Coefficients of Independent Variables
Thus, the optimal model for this study was;
Yi,t = 𝜷𝟎 + 𝜷1EVA + 𝜷2𝑹𝑶A + 𝜷3LEV+ 𝜷4ROE + α
Yi,t = 0.626 – 2.401EVA + 0.236𝑹𝑶𝑬 + 0.405ROA+ 𝜷40.385 +
4.4 To Test the Relationship between Financial performance and EVA
A linear regression was fitted to the data and the results are as displayed below:
Table 4.8 Summary Output
|Adjusted R Square||0.360778|
|Coefficients||Standard Error||t Stat||P-value|
The values of the Adjusted R square is relatively higher than at 0.3 which shows that there exist a slightly better fit in the analysis of the model. The coefficient of correlation is 0.487 which indicates the stronger positive relationship between the EVA and the financial performance. This demonstrates that EVA is a better estimate of financial performance of the entities.
This chapter will focus on the research findings discussion relating the study findings to the literature review and analyzing the implications of the findings to managers and decision makers.
5.1 Regression Analysis
From the findings of the study, it was determined that EVA, ROA, ROE and leverage provide a moderately good fit in predicting changes in financial performance. This is backed up by coefficient of determination which is known as the R square of 45.1%. This means that EVA, ROA, ROE, liquidity and leverage explains45.1% of the variations in the dependent variable which is financial performance of companies listed in New York Stock Exchange.
Further analysis indicated that there is a weaker negative correlation between the financial performance metrics such as ROE, ROA, but that of the Leverage and EVA, there exist a stronger negative relationship. The results that return on equity will align with EVA, which is in line with the findings obtained by Kramer & Peters (2011). He stated that there existed no relationship between the EVA and market return, but crucial relationship exists between the EVA and financial performance
5.2 The Relationship between Financial performance and EVA
The values of the Adjusted R square is relatively higher than at 0.3 which shows that there exist a slightly better fit in the analysis of the model. The coefficient of correlation is 0.487 which indicates the stronger positive relationship between the EVA and the financial performance. This demonstrates that EVA is a better estimate of financial performance of the entities.
In view of the general investigation discoveries, there is no huge positive connection between value EVA and ROI, ROA and liquid assets to liabilities. Be that as it may, There is a solid positive connection among EVA and ROE . High value prompts higher money related execution. Thus, there is a connection among EVA and financial performance. Organizations recorded in NYSE have high financial markers. Such Financial pointers are ROA,ROE,EVA, Liquidity and leverage. In view of the regression analysis, we found that, ROE only is affected altogether. Conversely, other dependent factors as ROA, Liquidity and leverage are not affected by EVA essentially. Fundamentally, EVA is profoundly engaged by the value base. Because of that, ROE is profoundly impacted by the EVA .Some of the reasons are better administration, operational productivity, and skilled workers. Organizations listed in NYSE keeps up legitimate records, financing, books and does well than organizations which are not listed. The discoveries of this examination are like that of Lehn and Makhija (1996) who considered EVA as performance measures and flag for key change. They found that the two estimates correspond emphatically with stock returns back with customary performance estimates like return on assets, return on equity and return on sales. And furthermore EVA has sway on financial performance
CHAPTER SIX – CONCLUSIONS AND RECOMMDATIONS
This section gives the outline of the investigation findings,discussions of the findings of the study where the exploration discoveries are contrasted and discoveries of different examinations which are applicable to the present examination and suggestions. The examination further shows the recommendation that can be employed by organizations. The researcher additionally makes suggestion for further examinations.
The study has shown that no evidence will support that EVA as the best measurement for assessing financial performance. EVA demonstrated a negative value that indicates the negative significance cost of capital and hence, no growth in the future expectation of EVA. The results that return on equity will align with EVA, which is in line with the findings obtained by Kramer & Peters (2011). He stated that there existed no relationship between the EVA and market return, but crucial relationship exists between the EVA and financial performance
6.2 Limitation of the Study
The study demonstrates fundamental shortcomings during the period to which the study was conducted. One of the limitations was the constraint of time and resources in conducting the research. Additionally, some company showed deferred tax, which was irrelevant to the cost implication and analysis.
EVA is an economic principle that the firm value increases only if it can generate sufficient surplus and based on theoretical concepts. However, the computation is subjective and does not provide enough information to show the signals that EVA will be increased based on the performance. However, it remains to be an internal financial performance factor compared to the conventional financial performance measure. The investors are required to be conscious of the existing capital structure and the cost of capital but need not be incorporated as a measure of financial performance. Despite the study being an empirical one, it had a narrower scope hence need to have in-depth research.
Additionally, the ignorance of the stakeholders and non-accountant of the EVA makes it a single period measure and hence not a wise investment measure. This means that it should be used for the measurement of productivity, which ultimately enhances the shareholders’ value. This means that there should be no valid argument that should be going against the economic value addition and hence crucial for management to understand the concept of cost capital to emphasize more on EVA as a measure of accounting
6.4 Suggestions for Further Research
There is a need to advance the research in this area, mainly to the firms that apply EVA as a performance. This raises the fundamental question of whether the EVA needs to be incorporated as an external measure of performance. The future research should also express the relationship between the EVA and size of the firm; capital employed as well as market return. Furthermore, the sensitivity of the cost of capital may give wrong or inaccurate value of EVA because the rate of return or cost of capital depends on various components which tend to change with time.
6.5 Personal reflections
This paper conclusion are not summed up all around, as one of the points is to examine the role EVA and financial performance of corporation listed in NYSE. Taking into consideration the experience of structuring a dissertation, the researcher realized that conducting a researcher is a rigorous process and it is a procedure which needs dedication and patience. The researcher is the kind of person who wants to study and consistently tries to acquire more material and information in the classroom and through field work. The researcher is mostly enthusiastic on acquiring knowledge on topics which relate to his future career and accounting management.
The researcher spent several hours working on this thesis, yet through it, the researcher discovered that, if the researcher set objectives, he can accomplish anything. As researcher reflects upon what he realized, that was most significant; it was genuinely observing that constancy pays. The researcher discovered that he can accomplish more than he wants to, so simply push.
The researcher is in apposition to reflect and understand that the procedure of writing a dissertation and conducting research has assisted him both as a student and as a young researcher. Research and constituting capacities are valued in a scholarly set up as well as in the finance and accounting area also. The researchers currently feel significantly about my structure capabilities and research abilities.
Additionally, working with my supervising professor has allowed the researcher the chance to build up a mentor/mentee association with an expert of accounting management. In general, the researcher feels this has been both an important and agreeable involvement and I presently feel arranged and energized for my up and coming academic and profession time.
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