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A Study of Economic Value Added Disclosures in the Annual Reports: Is EVA a Superior Measure of Corporate Performance?
Study of Economic Value Added Disclosures in the Annual Reports: Is EVA a Superior Measure of Corporate Performance?
Abstract
In the modern era, investors, creditors, analysts and other stakeholders are requiring much more insight about company’s performance, strategic direction and exposure to risk. This paper explains the concept of Economic Value Added (EVA) that is gaining popularity in India. We also examine whether EVA is a superior performance measure, both for corporate disclosure and for internal governance. Of late, companies in India have started focusing on shareholders wealth creation by adopting value-based models for measuring shareholder value that helps to align managerial decision-making with the firm preferences. In recent years, the EVA framework is gradually replacing the ‘traditional’ measures of financial performance on account of its robustness and its immunity from ‘creative’ accounting. Even though some leading Indian companies have already joined the band wagon of their American counterparts in adapting the EVA-based corporate performance systems, many other are hesitating as there is no strong evidence that the EVA system works in India. Till now, EVA disclosures are “not mandatory for the Indian companies.” Also, we examine the value-creation strategies of selected Indian companies by analyzing whether EVA better represents the market-value of these companies in comparison to conventional performance measures. In this regards, EVA and the conventional measures of corporate performance, such as, RONW, ROCE and EPS are analyzed. Moreover, ANOVA, trend analysis and regression analysis are used for analyzing the data. The study indicates that “there is no strong evidence to support Stern Stewart’s claim that EVA is superior to the traditional performance measures in its association with MVA.” As part of this study, we have also extensively surveyed the EVA disclosures in the Annual Reports made by the same sample group of 500 corporations from India. During 2010-11, just 17 Indian companies, from a sample of 500, were providing EVA disclosures in their annual reports.
- keywords
- Economic Value Added, Annual Reports, Corporate Performance Measure, Shareholders Wealth, Value Based Management, Empirical Analysis
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