Corporate Performance Measures in India: An Empirical Analysis

Abstract

Traditionally periodic corporate performance is most often measured using some variant of historical accounting income (eg. Net Profit, EPS) or some measures based on the accounting income (eg. ROI/ROCE). However it had long been recognized that accounting income is not a consistent predictor of firm value creation and the traditional measures are not appropriate for evaluation of corporate performance.

An appropriate measure of corporate performance on one hand should be highly correlated to share holder return and on the other hand should be able to signal the extent of periodic wealth creation. A search for such a measure had been the trigger for the rapidly growing literature on value based management (VBM). Among the set of popular VBM systems, a variant of the traditional residual income measure known as Economic Value Added (EVA) is arguably the most prominent.

This paper examines whether Economic Value Added has got a better predictive power relative to the traditional accounting measures such as EPS, ROCE, RONW, Capital Productivity (Kp) and Labor Productivity (Lp).

Analysis of 1000 companies across 6 years (6000 company years), very much supports the claim that the EVA is the better predictor of market value compared to other accounting measures. EVA is gaining recognition as fundamental measure of company performance despite the fact that it has been in existence for a relatively short period of time.

Keywords: EVA, Performance Measures, Market Value

JEL Classification: G00, J33, L21, M40, M52