EVA® Disclosures in the Annual Reports of Indian Companies

Abstract

Analyzing the annual reports of India’s largest 500 companies over a period of five years (from 2004 to 2008), the present study at first tries to examine the extent of Economic Value Added (EVA) reporting practices prevalent in Indian corporate sector. It reveals that just 37 companies (7.4 per cent of the sample) specifically mentioned the use of EVA metric in their public disclosures. The study also identifies the industry composition, preferred medium of EVA disclosure, areas of EVA applications and extent of EVA-related computations made and disclosed by the EVA reporting companies. The study finds that there exist significant inconsistencies and irregularities in the measurement of EVA and its major components by the EVA reporting companies. The second part of the study examines the corporate attributes that can be associated with the Indian companies’ EVA disclosure choices. Thus, the comparison of differences between the EVA reporting and EVA non-reporting companies on the basis of their background indicators and financial performance measures reveals that the EVA usage and disclosure choice of Indian companies is influenced by their size, profitability, leverage and sales efficiency. The study has implications for Securities and Exchange Board of India, Institute of Chartered Accountants of India, Company Law Board and other related parties that they should recognize the need to make EVA reporting mandatory in Indian corporate sector. Through the establishment of separate accounting standards for EVA computations and disclosure and further linking it with the employees’ compensation plans, companies can reap benefits in terms of shareholder value enhancement.