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    A Study On Value Creation Measures and Accounting Measures in Predicting Shareholders Return Evidence From Bombay Stock Exchange, India

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    A Study On Value Creation Measures and Accounting Measures in Predicting Shareholders Return Evidence From Bombay Stock Exchange, India

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    Suman Kumar
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    RESEARCH PAPER

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    RESEARCH PAPER

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    35 views4 pages

    A Study On Value Creation Measures and Accounting Measures in Predicting Shareholders Return Evidence From Bombay Stock Exchange, India

    Uploaded by

    Suman Kumar
    RESEARCH PAPER

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    A STUDY ON VALUE CREATION MEASURES AND

    ACCOUNTING MEASURES IN PREDICTING SHAREHOLDERS


    RETURN EVIDENCE FROM BOMBAY STOCK EXCHANGE,
    INDIA

    INTRODUCTION
    In today’s competitive world, value and value creation for shareholders are among the most
    important goals of businesses. For the sake of achieving his goals, the investor needs some
    instruments in order to evaluate the potential value of each opportunity of investment. It is clear that
    these instruments are not capable of predicting the exact future, they just provide some piece of
    information and advice that help the investor in the decisions he makes. Among these criteria, the
    most common types are Return on assets (ROA), Return on equity (ROE) and cash flow from
    operations (CFO). Despite the numerous applications of these instruments, theoretically, they are not
    related with shareholders’ value or creation wealth. In recent years, the modern evaluation methods
    based on economic profit such as Economic value added (EVA), Market value added (MVA),
    Refined economic value added (REVA), adjusted economic value added (AEVA), cash value added
    (CVA), shareholder value added (SVA) and created shareholder value (CSV) replace the accounting
    of accounting measures and have widely drawn the attentions. These criteria follow the performance
    assessment with regard to the changes in the value and alongside maximizing the long-term
    shareholder returns.

    NEED FOR THE STUDY

    Several studies have been conducted in the last two decades in the international market community
    to answer questions such as: (a) whether it is really better to use new value-based measures than
    traditional accounting performance measures to measure the corporate financial performance, or (b)
    which performance measure best explains corporations’ change in market value. Results are quite
    mixed and controversial. This study is inspired by the controversial results of the previous research
    and aims to investigate whether traditional and/or new value-based performance measures are
    explanatory power relevant shareholder return in Bombay Stock Exchange (BSE), India.

    OBJECTIVES

    To investigate the relation between the Value creation measures and accounting measures in
    predicting shareholder return in the Bombay Stock Exchange, India.
    MODEL

    The study performs a pooled regression analysis to performance measures (i.e., (EVA, REVA,
    MVA, SVA, CSV, CVA, ROA, ROE, EPS and CFO) in terms of explanatory power on SR, while
    controlling for firm size. The model is:

    SR = β0 + β1 EVA+ β2MVA + β3REVA + β4SVA +β5CVA +β6CSV + β7 ROA + β8 ROE


    + β9 CFO +β10EPS + β11SIZE+ 𝜀𝜀

    Where SR of a company over a given period are the actual dividend yields and capital gains to the
    company’s stockholders; EVA is the amount of economic value added for the owners by
    management, REVA represents refined EVA, estimated by using total market value of the firm’s
    assets in calculating total cost of capital; MVA represents market value added, estimated by
    summing all projected EVAs in the future.

    Shareholder value added (SVA) is defined as the difference between the present value of incremental
    cash flow before new investment and the present value of investment in fixed and working capital.
    Created shareholder value (CSV) for a company creates value for the shareholders when the
    shareholder return exceeds the share cost (the required return to equity). In other words, company
    creates value in one year when it outperforms expectations. Cash value added (CVA), contrast to
    EVA it is derived from cash flow numbers. CFO represents cash flow from operations; ROA is
    return on assets, estimated by dividing operating income before depreciation (OIBD) by total assets.
    ROE is return on equity, estimated by dividing OIBD by total shareholders’ equity; EPS is Earnings
    per Share and finally SIZE represents firm size that estimated by log of assets. Thus, Performance
    measures are calculated as follows

    The research of variables and how of measurement Performance measures Formula

    Economic Value Added (EVA)

    EVA = NOPAT – WACC (CAPITAL)

    Market Value Added (MVA)

    MVA = current market value of a firm – capital contributed by its investors

    Refined Economic Value Added (REVA)

    REVA = NOPAT – WACC (MCAPITAL)

    Shareholder Value Added (SVA)


    SVA = (Present value of cash flow from operations during the forecast period + residual value +
    marketable securities) – Debt

    Created Shareholder Value (CSV)

    CSV = Shareholder value added - (Equity market value× Ke)

    Cash Value Added (CVA)

    CVA= Operating cash flow – Economic depreciation – Capital charge (Gross investment× K)

    Return On Assets (ROA)

    ROA= Net Income/ Book Value of Assets

    Return On Equity (ROE)

    ROE= Net Income/ Book Value of Equity

    Cash Flow from Operations (CFO)

    CFO= Cash Flow from operations in Cash Flow statement

    Earnings Per Share (EPS)

    EPS= Net Income/ number of shares

    Shareholder Return (SR)

    SR= Capital Gains + Dividend Yield

    THE HYPOTHESES

    In testing the pooling regression model, hypothesis of the investigation are developed for
    construction sector. Furthermore, construction sectors will utilize the hypotheses, which as follows:

    H1: The value creation of EVA has information content in predicting SR

    H2: The value creation of MVA has information content in predicting SR

    H3: The value creation of REVA has information content in predicting SR

    H4: The value creation of SVA has information content in predicting SR

    H5: The value creation of CSV has information content in predicting SR

    H6: The value creation of CVA has information content in predicting SR


    H7: The accounting measures of ROA has information content in predicting SR

    H8: The accounting measures of ROE has information content in predicting SR

    H9: The accounting measures of CFO has information content in predicting SR

    H10: The accounting measures of EPS has information content in predicting SR

    REFERENCES

    [1] Bao, B-H. And D-H. Bao. (1998). Usefulness of Value Added and Abnormal Economic
    Earnings: An Empirical Examination, Journal of Business Finance and Accounting, 25(1-2), pp. 251-
    265.

    [2] Biddle, G. C., R. M. Bowen and J. S. Wallace. (1997). Does EVA Beat Earnings? Evidence on
    Associations with Stock Returns and Firm Values, Journal of Accounting and Economics 24(3), pp.
    301-336.

    [3] Chen, S. and J. L. Dodd. (1997). Economic Value Added®: An Empirical Examination of a New
    Corporate Performance Measure, Journal of Managerial Issues, 9(3), pp. 318-333.

    [4] Ebaid. (2009). the impact of capital-structure choice on firm performance empirical evidence
    from Egypt, The Journal of Risk Finance Vol. 10 No. 5, pp. 477-487.

    [5] Goetzmann, W. N. and S. J. Garstka. (1999). the Development of Corporate Performance


    Measure: Benchmarks before EVATM, Yale ICF Working Paper, 99-06, July 12, New Haven: Yale
    School of Management.

    [6] Goyandeh, K. (2007). Compare of information economic value added(EVA) and refined
    economic value added (REVA) in relationships by stock retune, Evidence from Tehran Stock
    Exchange, State college of Management, Shiraz University, Iran.

    [7] Günther, T., B. Landrock and T. Muche. (2000). Genwing versus Unternehmenswertorientierte
    performance - Eine Empirische Untersuchung auf Basis der Korrelation von Capital marktr enditen
    für die Deutsche DAX-100 -Unternehmen’ [Profit versus Value Based Performance Measures. An
    Empirical Investigation Based on the Correlation with Capital Market for German DAX-100
    Companies], Controlling, 1(2), pp. 69-75 and 2(3), pp. 129-134.

    [8] Jalaja. (2010). Shareholder Value Creation in India- a sectoral analysis, P 12.

    [9] Lee. S and Kim. W. G, EVA. (2009). refined EVA, MVA, or traditional performance measures
    for the hospitality industry? International Journal of Hospitality Management 28, 439–445.

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