A Study of Association between Market Value added and Earning-Based Measures (EBM) Vis-à-Vis Value-Based Performance Measures (VBM) - An Empirical Study of BSE SENSEX Companies

Authors

  • Avijit Sikdar

DOI:

https://doi.org/10.33516/rb.v43i1.1-24p

Keywords:

Economic Value Added (EVA), Cash Value Added (CVA), Share Holders’ Value Added (SVA), Earning per Share(EPS), Return on Assets(ROA).

Abstract

Investors are interested in assessing the corporate financial performance that correlate with shareholders' wealth maximization, measured by the market price of share. Traditional earning-based performance measures like return on investment, earnings per share, etc., have been used as the most important indicators for measuring the corporate performance. But the insufficiency and somewhat irrelevancy of accounting based performance indicators have given rise to the need of alternative performance indicators. The value-based performance indicators is an answer to the limitations of traditional accounting based performance indicators. There are several value based measures such as Economic Value Added (EVA), shareholder Value Added (SVA) and Cash Value Added (CVA).

This paper attempts to examine empirically the relevance and association between Market value added and value based performance indicators versus traditional earning based performance indicators and their interrelationship with reference to Indian companies. In this paper we also study Incremental information content of value-based performance indicators over earning -based performance indicators. We have selected all the non-financial and non-banking companies Listed in the Bombay Stock Exchange (BSE) and forming part of Sensex. The study period covers 16 years from 31st March 2000 to 31st March, 2015. This study strongly indicates that Value-based indicators are superior to the traditional performance measures in its association with market value of shares.

The finding of the study of association between Market Value Added and earning-based performance measures indicates that the variation of MVA is not strongly explained by the Earning-based performance Indicators. The outcome of the study of association between Market Value Added and Value-based performance measures indicates that EVA and SVA are strongly related with MVA variation. CVA is not showing strong association with MVA. Although, on overall basis we can conclude that the variation of MVA is significantly explained by the Value-based performance Indicators. The results of the study of relationship between two sets of performance indicators, reveals that the relationship between value-based performance indicators and earning-based indicators is moderate. Incremental information content test show that Value-based performance indicators give positive incremental information to explain the variation of shareholder's wealth, measured by Market Value Added, when they are added with traditional earning-based performance indicators for all the companies. On overall basis we can generalize that the value-based performance indicators could better capture the stock market reality than the traditional accounting earning based performance indicators.

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Published

2017-04-01

How to Cite

Sikdar, A. (2017). A Study of Association between Market Value added and Earning-Based Measures (EBM) Vis-à-Vis Value-Based Performance Measures (VBM) - An Empirical Study of BSE SENSEX Companies. Research Bulletin, 43(1), 1–24. https://doi.org/10.33516/rb.v43i1.1-24p

Issue

Volume 43, Issue 1, April 2017

Section

Articles
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