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Title Economic Value Added: Its Validity and Contribution: Evidence From Pakistan

Author(s) Zeeshan Khan

Abstract Title: Economic Value Added: Its Validity and Contribution – Evidence From Pakistan The ultimate objective of any business entity is to create wealth for its shareholders. Creating wealth in a recent competitive environment requires adaptability and flexibility in operations along with a vigilant control system. Measuring a firm’s performance is a matter of great concern, for the management of the firms, as which performance evaluation tool best describes the value of the firm. The fact is that the very conventional income based measurement tools are still dominating the corporation’s financial evaluation process. Many new performance evaluation tools have been introduced to challenge the supremacy of these conventional measurement tools, out of which one is economic value added. Economic value added is proposed by Stern Stewart and Company in 1991 with a claim of being the superior performance evaluation tool than traditional accounting measures. Economic value added is a new proposition, but the concept is not new as it traces back to 1890, when Alfred Marshall first introduced the concept of residual income. Economic value added being the new variant of the residual income model, yet striving to find its place as a superior performance evaluation metric because the existing literature provides mixed evidence regarding its superiority. This study attempts to compare economic value added and traditional accounting measures i.e. (return on capital employed, return on total assets, debt to equity ratio, earning per share after tax and operating cash flows) in explaining stock prices. The analysis is based on which performance evaluation metric provide more relative and incremental information content in explaining the market value of shares. Regression analysis is used in order to find whether economic value added outperform traditional accounting measures, in explaining the market value of shares, by providing more relative and incremental information content or it is just a myth. The results of the study reveal that economic value added failed to provide any relative information content in explaining the market value of shares. However economic values added do provide a negligible amount of incremental information content in explaining stock prices. Hence the economic value added does not withhold its claim as a superior performance evaluation tool in explaining stock prices as per this study.

Type Thesis/Dissertation MS

Faculty Management Sciences

Department Management Sciences

Language English

Publication Date 2019-01-17

Subject Finance

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