VALUE RELEVANCE OF EVA AND TRADITIONAL PERFORMANCE MEASURES IN DETERMINING SHAREHOLDER VALUE – USE OF EASTON AND HARRIS MODEL (1991) – EVIDENCE FROM INDIA

The main aim of corporate finance is creation of shareholder value. The term shareholder value creation has become quite popular in the recent times attracting much debate and attention from theorists of corporate finance all over the world. Studies were conducted to determine the measures that reflect shareholder value. Initially, many financial theorists explored the adaptability of conventional accounting-based performance measures like EPS, ROA, ROE etc. for measuring shareholder value. Later, as the concept of Value based Management evolved, a new value-based measure known as Economic Value Added (EVA) came into limelight which was presumed to be the most relevant and significant measure in revealing the true value of firms. Many studies were conducted examining the superiority of EVA over traditional accounting-based measures of performance in explaining shareholder value as indicated by Stock returns, MVA etc. Nevertheless, there were not conclusive evidence that established the best measure of shareholder value. This paper explores the validity of EVA and traditional accounting-based performance measures like ROA, ROE, EPS, PAT in explaining Stock Returns and MVA from the context of Indian capital markets. A sample of 55 manufacturing companies belonging to CNX NIFTY 100 were analyzed over a period of ten years from 2008-09 to 2018- 19. Panel data regression models were developed to investigate the value relevance of EVA and traditional performance measures on shareholder value. All the performance measures at levels and change positions together were significantly value relevant in explaining the changes in shareholder value in the context of Indian capital market. The findings of incremental information content tests revealed EPS as the best predictor variable for Stock returns, EVA to be the best predictor variable in explaining MVA.