An Empirical Analysis of Linkage Between Economic Value Added (EVA) and Market Value Added (MVA)

Abstract

Maximizing shareholder value has become the new corporate paradigm. Corporations in world wide have started disclosing EVA information from the beginning of 90s as a measure of corporate performance. It is believed that market value of a firm (i.e., the shareholders’ wealth) would increase with the increase in EVA. Many studies conducted in US and India also confirmed this belief. EVA is a residual income that subtracts the cost of capital from the operating profits generated by a business. The present study makes an attempt to find the relevance of Stewart's claim that market value of the firm is largely driven by its EVA generating capacity in the Indian context. Based on the data from the annual reports of Dr Reddy’s laboratories Ltd, over a period of five years, the study shows that market value of a firm can be well predicted by estimated future EVA streams. The study has also found that market value of the firm is explained more by current operational value than future growth value of the company.

Keywords: Weighted Average Cost of Capital, NOPAT, EVA, MVA

JEL Classification: G30