Does EVA Beat ROA and ROE in Explaining the Stock Returns in Indian Scenario? An Evidence Using Mixed Effects Panel Data Regression Model

Abstract

We study a panel data of 1,700 Indian firms listed in either National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) for the period 2001 to 2016 to see if economic value added (EVA) explains the annual stock returns of these Indian firms better than return on assets (ROA) and return on equity (ROE). Using mixed effect model, we find that EVA does explain the annual stock returns of these Indian firms better than ROA and ROE.

Keywords

Economic value added return on assets return on equity mixed effects model panel data regression

Get full access to this article

View all access options for this article.

References

Abate

J. A.

, Grant

J. L.

, & Stewart III

G. B.

(2004). The EVA style of investing. The Journal of Portfolio Management, 30(4), 61–72.

Acheampong

Y. J.

, & Wetzstein

M. E.

(2001). A comparative analysis of value-added and traditional measures of performance: An efficiency score approach. doi: 10.2139/ssrn.259200

Agrawal

, & Goyal

(2018). A survey of EVA disclosure practices in annual reports of Indian corporates. International Journal of Current Advanced Research, 7(1), 9572–9584.

Agarwalla

S. K.

, Jacob

, & Varma

J. R.

(2013). Four factor model in Indian equities market (Working Paper No. 2013-09-05). Ahmedabad: Indian Institute of Management Ahmedabad. Retrieved from http://www.iimahd.ernet.in/~iffm/Indian-Fama-French-Momentum/four-factors-India-90s-onwards-IIM-WP-Version.pdf

Alsoboa

S. S.

(2017). The influence of economic value added and return on assets on created shareholders value: A comparative study in Jordanian public industrial firms. International Journal of Economics and Finance, 9(4), 63.

Athanassakos

(2007). Value-based management, EVA and stock price performance in Canada. Management Decision, 45(9), 1397–1411. Retrieved from http://www.emeraldinsight.com/0025-1747.html

Bacidore

J. M.

, Boquist

J. A.

, Milbourn

T. T.

, & Thakor

A. V.

(1997). EVA and total quality management. Journal of Applied Corporate Finance, 10(2), 81–89.

Berzakova

, Bartosova

, & Kicova

(2015). Modification of EVA in value-based management. Procedia Economics and Finance, 26, 317–324.

Bhandari

L. C.

(1988). Debt/Equity ratio and expected common stock returns: Empirical evidence. Journal of Finance, 43(2), 507–528.

10.

Biddle

G. C.

, Bowen

R. M.

, & Wallace

J. S.

(1997). Does EVA beat earnings? Evidence on associations with stock returns and firm values. Journal of Accounting and Economics, 24(3), 301–336.

11.

Biddle

G. C.

, Bowen

R. M.

, & Wallace

J. S.

(1999). Evidence on EVA. Journal of Applied Corporate Finance, 12(2), 69–79.

12.

Biddle

G. C.

, Seow

G. S.

, & Siegel

A. F.

(1995). Relative versus incremental information content. Contemporary Accounting Research, 12(1), 1–23.

13.

Chen

, & Dodd

(1997). Economic value added (EVA): An empirical examination of new corporate performance measure. Journal of Managerial Issues, 9(3), 318–333.

14.

Cordeiro

J. J.

, & Kent Jr.

D. D.

(2001). Do EVA adopters outperform their industry peers? Evidence from security analyst earnings forecasts. American Business Review, 19(2), 57–63.

15.

Custódio

, & Metzger

(2014). Financial expert CEOs: CEO’s work experience and firm’s financial policies. Journal of Financial Economics, 114(1), 125–154.

16.

De Medeiros

O. R.

(2005). Empirical evidence on the relationship between EVA and stock returns in Brazilian firms.

17.

De Wet

J. H.

(2005). EVA versus traditional accounting measures of performance as drivers of shareholder value: A comparative analysis. Meditari Accountancy Research, 13(2), 1–16.

18.

De Wet

J. H. V. H.

, & Du Toit

(2007). Return on equity: A popular, but flawed measure of corporate financial performance. South African Journal of Business Management: Association of Professional Management (APM), 38(1), 59–69.

19.

Dodd

J. L.

, & Chen

(1996). EVA: A new panacea. Business and Economic Review, 42(4), 26–28.

20.

Doppegieter

, & Zoller

(2018). Adjusting economic value added for intangible assets. Retrieved from https://www.researchgate.net/publication/237755426_Adjusting_Economic_Value_Added_for_Intangible_Assets

21.

Erasmus

P. D.

(2008). Evaluating value-based financial performance measures (Doctoral dissertation). University of Stellenbosch, Stellenbosch.

22.

Ferguson

, Rentzler

, & Yu

(2005). Does economic value added (EVA) improve stock performance or profitability? The Journal of Applied Finance, 15(2), 101–113.

23.

Garvey

, & Milbourn

(2000). EVA versus earnings: Does it matter which is more highly correlated with stock returns? Journal of Accounting Research, 38, 209–245.

24.

Girotra

, & Yadav

S. S.

(2001). Economic value added (EVA): A new flexible tool for measuring corporate performance. Global Journal of Flexible Systems Management, 2(1), 7–18.

25.

Gjesdal

(1981). Accounting for stewardship. Journal of Accounting Research, 19(1), 208–231. Retrieved from http://www.jstor.org/stable/2490970

26.

Goldberg

S. R.

(1999). Economic value added: A better measure for performance and compensation? Journal of Corporate Accounting & Finance, 11(1), 55–67.

27.

Grabowska

(2014). Economic value added and competitive position of enterprises: Case Research. Business & Economic Horizons, 10(3), 165–176.

28.

Grant

(2003). Foundations of economic value added (2nd ed.). New York, NY: John Wiley & Sons.

29.

Gujarati

(2015). Econometrics by example (2nd ed.). London: Palgrave Macmillan.

30.

Haddad

(2012). The relationship between economic value added and stock returns: Evidence from Jordanian banks. International Research Journal of Finance and Economics, 89(1), 6–14.

31.

Irala

, & Reddy

(2005). EVA: The right measure of managerial performance? Indian Journal of Accounting & Finance, 119(2), 15–36.

32.

Ismail

(2006). Is economic value added more associated with stock return than accounting earnings? The UK evidence. International Journal of Managerial Finance, 2(4), 343–353.

33.

Ittner

C. D.

, & Larcker

D. F.

(1998). Are non-financial measures leading indicators of financial performance? An analysis of customer satisfaction. Journal of Accounting Research, 36(3), 1–35.

34.

Jakub

, Viera

, & Eva

(2015). Economic value added as a measurement tool of financial performance. Procedia Economics and Finance, 26, 484–489.

35.

Kangarloei

S. J.

, Motavassel

, Arzanlu

, & Soleimani

(2012). The investigation of the relationship between economic value added (EVA) and return on assets (ROA) in Tehran Stock Exchange (TSE). Business Management Dynamics, 1(11), 1–5.

36.

Kleiman

R. T.

(1999). Some new evidence on EVA companies. Journal of Applied Corporate Finance, 12(2), 80–91.

37.

Koh

, Durand

R. B.

, Dai

, & Chang

(2015). Financial distress: Lifecycle and corporate restructuring. Journal of Corporate Finance, 33, 19–33.

38.

Kramer

J. K.

, & Pushner

(1997). An empirical analysis of economic value added as a proxy for market value added (digest summary). Financial Practice and Education, 7(1), 41–49.

39.

Kumar

, & Sharma

A. K.

(2011). Association of EVA and accounting earnings with market value: Evidence from India. Asia-Pacific Journal of Business Administration, 3(2), 83–96.

40.

Kurmi

M. K.

, & Rakshit

(2017). Information content of EVA and traditional accounting-based financial performance measures in explaining corporation’s change of market value. International Journal of Research in Finance and Marketing (IJRFM), 7(2), 1–14.

41.

Kyriazis

, & Anastassis

(2007). The validity of the economic value added approach: An empirical application. European Financial Management, 13(1), 71–100.

42.

Lehn

, & Makhija

A. K.

(1996). EVA & MVA as performance measures and signals for strategic change. Strategy & Leadership, 24(3), 34–38.

43.

Lehn

, & Makhija

A. K.

(1997). EVA, accounting profits, and CEO turnover: An empirical examination: 1985–1994. Journal of Applied Corporate Finance, 10(2), 90–97.

44.

Lin

C. H. E. N.

, & Zhilin

(2008). Empirical study of integrated EVA performance measurement in China. Canadian Social Science, 4(2), 41.

45.

Lin

F. L.

, & Chang

(2011). Does debt affect firm value in Taiwan? A panel threshold regression analysis. Applied Economics, 43(1), 117–128.

46.

Lovata

L. M.

, & Costigan

M. L.

(2002). Empirical analysis of adopters of economic value added. Management Accounting Research, 13(2), 215–228.

47.

Maditinos

, Sevic

, & Theriou

(2006). A review of the empirical literature on earnings and economic value added (EVA) in explaining stock market returns. Which performance measure is more value relevant in the Athens Stock Exchange (ASE)? In Annual Conference of the Hellenic Finance and Accounting Association Thessaloniki (pp. 15–16).

48.

Maditinos

, Sevic

, Theriou

, & Dimitriadis

(2007). The use of traditional and modern value-based performance measures to evaluate companies’ implemented and future strategies in the Greek Capital Market: The case of EPS and EVA. Journal of International Research Publications, 2, 35–50.

49.

Miller

, & Friesen

(1984). A longitudinal study of the corporate life cycle. Management Science, 30(10), 1161–1183.

50.

Misra

, & Kanwal

(2007). Economic value added as the most significant measure of financial performance: A study of select Indian firms. Journal of International Business and Economics, 7(1), 76–85.

51.

Modigliani

, & Miller

M. H.

(1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(3), 433–443.

52.

Mohanty

(2004). In defense of EVA. In Pacific Basin Finance, Economics and Accounting Conference (pp. 9–11).

53.

Mueller

(1972). A life cycle theory of the firm. Journal of Industrial Economics, 20(3), 199–219.

54.

Nakhaei

, Hamid

N. I. N.

, Anuar

M. A.

, & Nakhaei

(2016). Is refined economic value added more associated with stock return than accounting measures? The Malaysian evidence. Society and Economy in Central and Eastern Europe, 38(1), 69–85.

55.

O’Byrne

S. F.

(1996). EVA and market value. Journal of Applied Corporate Finance, 9(1), 116–126.

56.

Pataky

T. J.

(2012). Is economic value added (EVA) the best way to assemble a portfolio? (Doctoral dissertation). University of Central Florida, Orlando, FL.

57.

Popa

, Mihailescu

, & Caragea

(2009). Advanced method for performance evaluation in banks. Economia Seria Management, 12(1). Retrieved from https://www.researchgate.net/publication/287275812_The_relationship_between_economic_value_added_and_stock_returns_Evidence_from_Jordanian_banks

58.

Puri

, & Zarutskie

R. E.

(2011). On the lifecycle dynamics of venture-capital and non-venture-capital-financed firms. Journal of Finance, 67(6), 2177–2210.

59.

Rakshit

(2006). EVA based performance measurement: A case study of Dabur India Limited. Vidyasagar University Journal of Commerce, 11, 40–59.

60.

Rappaport

(1981). Selecting strategies that create shareholder value. Harvard Business Review, 59(3), 139–149.

61.

Rappaport

(1986). Creating shareholder value (1st ed.). New York, NY: The Free Press.

62.

Rappaport

(1998). Creating shareholder value: A guide for managers and investors (2nd ed.). New York, NY: The Free Press.

63.

Saji

T. G.

(2014). EVA and stock returns in emerging markets: The Indian evidence. IUP Journal of Accounting Research & Audit Practices, 13(4), 25.

64.

Shah

, Haldar

, & Nageswara Rao

S. V. D.

(2015). Economic value added: Corporate performance measurement tool. Corporate Board, 11(1). Retrieved from https://ssrn.com/abstract=2607437

65.

Shalini

H. S.

, & Preethi

V. S.

(2012). A comparative study of financial dialectics and economic value added v/s. traditional profit based measures: A case study at BHEL Electro Porcelains Division (EPD). IOSR Journal of Business and Management, 4(6), 37–55.

66.

Sharma

F. C.

(2016). Financial management. Agra: SBPD Publications. Retrieved from https://books.google.co.in/books?isbn=9383697857

67.

Sloan

R. G.

(1993). Accounting earnings and top executive compensation. Journal of Accounting and Economics, 16(1–3), 55–100.

68.

Stepanyan

G. G.

(2012). Revisiting firm life cycle theory for new directions in finance. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2126479

69.

Stern

, Stewart III

G. B.

, & Chew

(1995). The EVA financial management system. Journal of Applied Corporate Finance, 8(2). Retrieved from http://ssrn.com/abstract=6704

70.

Stewart III

G. B.

(1991). The quest for value. New York, NY: Harper Collins Business.

71.

Velez-Pareja

(2001). Value creation revisited: The economic profit. Retrieved from https://ssrn.com/abstract=195448;https://www.researchgate.net/publication/228248513_Value_Creation_Revisited_The_Econmic_Profit

72.

Taslim

F. A.

(2018). The influence of economic value added and market value added on corporate value. Russian Journal of Agricultural and Socio-Economic Sciences, 74(2), 90–98.

73.

Taufik

, Isnurhadi

, & Widiyanti

(2008). The influence of traditional accounting and Economic Value Added approaches on stock returns of banks listed on Jakarta Stock Exchange (JSX).

74.

Taufik

, Wahyudi

, Raneo

A. P.

, Muizzuddin

, & Mohamad

(2018). Do traditional accounting and economic value added mediate the relationship between corporate governance and firm value of Indonesian state-owned enterprises? International Journal of Economics and Financial Issues, 8(3), 118.

75.

Teker

, Teker

, & Sonmez

(2011). Economic value added performances of publicly owned banks: Evidence from Turkey. International Research Journal of Finance and Economics, 75, 132–137. Retrieved from https://www.researchgate.net/publication/287275812_The_relationship_between_economic_value_added_and_stock_returns_Evidence_from_Jordanian_banks

76.

Wang

Y. S.

, & Jiang

(2016). Bank failure prediction models for the developing and developed countries: Identifying the economic value added for predicting failure. Asian Economic and Financial Review, 6(9), 522.

77.

Worthington

A. C.

, & West

(2004). Australian evidence concerning the information content of economic value added. Australian Journal of Management, 29(2), 201–223.

78.

Yusbardini

(2017). Economic value added vs. firm performance. International Journal of Economic Perspectives, 11(1), 1683–1691.