EVA-based financial performance measurement: An evidential study of selected emerging country companies

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Abstract

This paper aims at examining the claims that economic value added (EVA) is a superior performance indicator than the traditional performance indicators like ROCE, NOPAT, EPS, OCF, and RONW. This study investigates the relative explanatory power of EVA measure of non-financial Indian companies with respect to two measures, market value added and stock returns used as a proxy for shareholder value. The analysis is performed for a sample of 46 Indian companies for the period of 2009-2019. The panel data regression models are employed to test the relative and incremental information content of EVA and other audited accounting-based measures. Relative information content tests reveal that NOPAT and OCF appear to be more value-relevant than EVA in explaining the market value of Indian companies. It was also found that ROA is more closely associated with stock market returns than EVA. Additionally, incremental information content tests suggest that EVA underperforms in comparison with NOPAT and OCF in analysing market value added. It was also found that EVA does not add any incremental information content to that provided by ROA and ROE accounting measures in explaining stock returns. Overall, the findings do not support the purported superiority of EVA to established accounting variables in association with market value or stock market returns of the firm. It is concluded that non-financial variables such as research and development, customer satisfaction, internal business process efficiency, innovation, employee satisfaction, CSR, product quality apart from financial variables drive market value and should be considered by investors in developing their investment strategies.

Keywords: EVA, Panel Data, Relative Explanatory Power, Market Value Added

Authors’ individual contribution: Conceptualization – K.G.; Methodology – S.O.; Formal Analysis – K.G.; Resources – S.O.; Writing – Original Draft – S.O.; Writing – Review & Editing – K.G.; Funding Acquisition – S.O. and K.G.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, F65, M41

Received: 25.05.2020
Accepted: 16.10.2020
Published online: 19.10.2020

How to cite this paper: Goel, K., & Oswal, S. (2020). EVA-based financial performance measurement: An evidential study of selected emerging country companies. Corporate Ownership & Control, 18(1), 179-195. https://doi.org/10.22495/cocv18i1art14