INVESTIGATING THE RELATIONSHIP BETWEEN MARKET VALUE-ADDED (MVA) AND ECONOMIC VALUE-ADDED MOMENTUM (EVAM): EMPIRICAL EVIDENCE FROM TURKIYE

Year 2023, , 85 - 97, 30.06.2023

Kartal Demırgunes

https://doi.org/10.17261/Pressacademia.2023.1731

Abstract

Purpose- This study aims to investigate the possible relationship between market value added (MVA) and economic value-added momentum (EVAM). Besides, any possible linkage between leverage (in terms of the degree of combined leverage) and market value added is also tested.
Methodology- This study conducts a time series analysis to the quarterly data of manufacturing industry, comprising Borsa Istanbul (BIST) listed manufacturing firms for the period of 2001.q2-2022.q4 to test MVA-EVAM relationship. It employs autoregressive distributed lag (ARDL) bounds testing approach, developed firstly by Pesaran and Shin (1999) and further revised by Pesaran, Smith and Shin (2001). The stationarity of the series is tested by the Augmented Dickey-Fuller (ADF) and Phillips and Perron (PP) unit root tests.
Findings- Empirical findings from ARDL bounds testing approach refers the existence of long-run relationships between market value added and economic value added momentum; and market value added and degree of total leverage. The coefficients of the long-run form of ARDL model reveal that both economic value-added momentum and degree of combined leverage have statistically significant and negative effects on market value added. The estimated short-run coefficients indicate that economic value added momentum has significantly negative effect on market value added created as similar to the long-run finding. Another finding is that though leverage has significantly positive effect on market value added in the short-run, this positive effect turns out to be negative in lag one period.
Conclusion- This study contributes to the literature on MVA-EVA relationship by employing autoregressive ARDL bounds testing approach to manufacturing industry comprising Borsa Istanbul (BIST) listed manufacturing firms of Turkey as an emerging market. Besides, the research model includes EVAM -as an independent variable- that is so rarely considered in existing literature.

Keywords

Market value-added, economic value-added momentum, leverage, time series analysis, ARDL bounds testing approach

References

• Akaike, H. (1974). A new look at the statistical model identification. IEEE Transactions on Automatic Control, 19(1), 716-723.
• Al-Assaf, G., & Al-Abdulrazag, B. (2015). The validity of export-led growth hypothesis for Jordan: a bounds testing approach. International Journal of Economics and Financial Issues, 5(1), 199-211.
• Aloy Niresh, J. & Alfred, M. (2014). The association between economic value added, market value added and leverage. International Journal of Business and Management, 9(10), 126-133.
• Bahri, M., St-Pierre, J., & Sakka, O. (2011). Economic value added: a useful tool for SME performance management. International Journal of Productivity and Performance Management, 60(6), 603-621.
• Banerjee, A. (2000). Linkage between economic value added and market value. Vikalpa, 25(3), 23-36.
• Banerjee, A., Donaldo, J. , Galbraith, J., & Hendry, D. (1993). Co-integration, error-correction, and the econometric analysis of non-stationary data. USA: Oxford University Press.
• Bao, B.-H., & Bao, D.-H. (1998). Usefulness of value added and abnormal economic earnings: An empirical examination. Journal of Business Finance and Accounting, 25(1-2), 251-265.
• Beaver, G. (2001). Corporate performance and shareholder value. Strategic Change, 10(5): 241-245.
• Biddle, G. C., Bowen, M. R., & Wallace, J. S. (1998). Economic value added: some empirical evidence. Managerial Finance, 24(11), 60-71.
• Biddle, G. C., Bowen, R. M., & Wallace, J. S. (1997). Does EVA beat earnings? Evidence on associations with stock returns and firm values. Journal of Accounting and Economics, 24(3), 301-336.
• Breusch, T. S. (1978). Testing for autocorrelation in dynamic linear models. Australian Economic Papers, 17 (31), 334-355.
• Breusch, T. S., & Pagan, A. R. (1979). A simple test for heteroscedasticity and random coefficient variation. Econometrica, 47(5), 1287-1294.
• Charlton, M., & Caimo, A. (2012). Time series analysis. Research Report. ESPON.
• Chen, S., & Dodd, J. L. (1997). EVA: An empirical examination of a new corporate performance measure. Journal of Managerial Issues, 9(3), 318-333.
• Cheng, L. (2011). Study on the special adjustment methods for calculating EVA. Proceedings of the 8th International Conference on Innovation and Management, November 30-December 2, Japan, 1333-1336.
• Coles, J. W., McWilliams, V. B., & Sen, N. (2001). An examination of the relationship of governance mechanisms to performance. Journal of Management, 27(1), 23-50.
• Cryer, J. D., & Chan, K.-S. (2008). Time series analysis: with Applications in R. New York: Springer Text in Statistics.
• Damodaran, A. (2005). Valuation approaches and metrics: a survey of the theory and evidence. Foundations and Trends in Finance, 1(8) 693-784.
• Davidson, J., Hendry, D., Srba, F., & Yeo, S. (1978). Econometric modelling of the aggregate time series relationship between consumers' expenditures and income in the United Kingdom. Economic Journal, 88(352), 661-692.
• De Villiers, J., & Auret, C. J. (1997). A comparison of EPS and EVA as explanatory variables for share price. Studies in Economics and Econometrics, 22(2), 47-63.
• De wet, J. H. & Hall, J. H., The relationship between EVA, MVA and leverage. Meditari Accountancy Research, 12(1), 39-59.
• De wet, J. H. (2005). EVA versus traditional accounting measures of performance as drivers of shareholder value - a comparative analysis. Meditari Accountancy Research, 13(2), 1-16.
• Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057-1072.
• Dierks, P. A. & Patel, A. (1997). What is EVA, and how can it help your company? Management Accounting, 79(5), 52-58.
• Dodd J. L. & Chen, S. (1999). EVA: a new panacea? Business and Economic Review, 42(4), 26-28.
• Durr, R. H. (1992). An essay on cointegration and error correction models. Political Analysis, 4(), 185-228.
• Ehrbar, Al (1998). EVA: the real key to creating wealth. Hoboken, New Jersey: John Wiley & Sons.
• Engle, R. & Granger, G. (1987). Cointegration and error correction: representation, estimation and testing. Econometrica, 55(2), 251-276.
• Fayed, A. M., & Dubey, S. (2016). An empirical study of impact of EVA momentum on the shareholders’ value creation as compared to traditional financial performance measure with special reference to the UAE. International Journal of Economics and Finance, 8(1), 23-38.
• Fernandez, P. (2003). EVA, economic profit and cash value added do not measure shareholder value creation. Journal of Applied Finance, 9(3), 74-94.
• Fernandez, P. (2004). Valuing companies by cash flow discounting: ten methods and nine theories. Working Paper, University of Navarra, IESE Business School.
• Fernandez, P. (2005). Equivalence of ten different methods for valuing companies by cash flow discounting. International, Journal of Finance Education, 1(1): 141-168.
• Fuller, W. A. (1976). Introduction to statistical time series. Hoboken, New Jersey: John Wiley & Sons.
• Godfrey, L. G. (1978a). Testing against general autoregressive and moving average error models when the regressors include lagged dependent variables. Econometrica: Journal of the Econometric Society, 46(6), 1293-1301.
• Godfrey, L. G. (1978b). Testing for higher order serial correlation in regression equations when the regressors include lagged dependent variables. Econometrica: Journal of the Econometric Society, 46(6), 1303-1310.
• Granger, C. W. J. (1981). Some properties of time series data and their use in econometric model specification. Journal of Econometrics, 16(1), 121-130.
• Granger, C. W. J., & Newbold, P. (1974). Spurious regressions in econometrics. Journal of Econometrics, 2(2), 111-120.
• Grant, J. (2003). Foundations of economic value added. Hoboken, New Jersey: John Wiley & Sons.
• Grant, J. L. (1997). Foundations of economic value added. Hoboken, New Jersey: John Wiley & Sons.
• Gujarati, D. N. (2006). Essentials of econometrics. London: McGraw-Hill Education.
• Hatfield, G. R. (2002). R&D in an EVA world. Research Technology Management, 45(1), 41-47.
• Irala, L. R. (2005). Economic value added: the right measure of managerial performance. Indian Journal of Accounting and Finance, 119(2), 1-10.
• Ismail, A. (2006). Is economic value added more associated with stock return than accounting earnings? The UK evidence. International Journal of Managerial Finance, 2(4), 343-353.
• Jarque, C. M., & Bera A. K. (1980). Efficient tests for normality, homoscedasticity and serial independence of regression residuals. Economics Letters, 6(3), 255-259.
• Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic and Dynamics and Control, 12(2-3), 231-254.
• Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551-1580.
• Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210.
• Johnson, W. B., Natarajan, A. & Rappaport, A. (1985). Shareholder returns and corporate excellence. Journal of Business Strategy, 6(2), 52-62.
• Kim, K. S. (2004). Strategic planning for value-based management an empirical examination. Management Decision, 42(8), 938-948.
• Kim, W. G. (2006). EVA and traditional accounting measures: which metric is a better predictor or market value of hospitality companies? Journal of Hospitality and Tourism Research, 30(1), 34-49.
• Kramer, J. K., & Pushner, G. (1997). An empirical analysis of economic value added as a proxy for market value added. Financial Practice and Education, 7(1), 41-49.
• Kramer, J. K., Peters, J. R. (2001). An inter-industry analysis of economic value added as a proxy for Market Value Added. Journal of Applied Finance, 11(1), 41-49.
• Kumar, S., & Sharma, A. K. (2011). Association of EVA and accounting earnings with market value: evidence from India. Asia-Pacific Journal of Business Administration, 3(2), 83-96.
• Kumar, S., & Sharma, A. K. (2011a). Association of EVA and accounting earnings with market value: evidence from India. Asia-Pacific Journal of Business Administration, 3(2), 83-96.
• Kyriazis, D., & Anastassis, C. (2007). The validity of the EVA approach: an empirical application. European Financial Management, 13(1), 71-100.
• Lee, S., & Kim, W. G. (2009). EVA, refined EVA, MVA, or traditional performance measures for the hospitality industry. International Journal of Hospitality Management, 28(3), 301-484.
• Lee, S., & Kim, W. G. (2009). EVA, refined EVA, MVA, or traditional performance measures for the hospitality industry. International Journal of Hospitality Management, 28(3), 301-484.
• Lehn, K., & Makhija, A. K. (1996). EVA and MVA: as performance measures and signal for strategic change. Strategy and Leadership, 24(3), 34-38.
• Lintner, J. (1965). The valuation of risk assets on the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, 47(1): 13-37.
• Maeenuddina, R. B., Hussain, A., Hafeez, M., Khan, M., & Wahi, N. (2020). Economic value-added momentum & traditional profitability measures (ROA, ROE & ROCE): a comparative study. Test Engineering and Management, 83, 13762-13774.
• Marshall, A. (1890). Principles of economics. London: Macmillan.
• Milunovich, S., & Tsuei, A. (1996). EVA in the computer industry. Journal of Applied Corporate Finance, 9(1), 104-115.
• Misra, A., & Kanwal, A. (2007). EVA as the most significant measure of financial performance: a study of select Indian firms. Journal of International Business and Economics, 7(1), 76-85.
• Nakhaei, H., Nik Intan, H., Melati, A., & Nakhaei, K. (2013). Evaluation of company performance with accounting and economic criteria in Bursa Malaysia. Journal of Global Business and Economics, 6(1), 49-63.
• O’Byrne, S. F. (1996). EVA and its critics. Journal of Applied Corporate Finance, 12(2), 92-96.
• Panigrahi, S. K., Zainuddin, Y., & Azizan, A. (2014). Comparing traditional and economic performance measures for creating shareholder’s value: a perspective from Malaysia. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(4), 280-289.
• Pesaran, M. H, Smith, R. J. & Shin, Y. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
• Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed lag modeling approach to cointegration analysis. In S. Strom, A. Holly & P. Diamond (Eds.), Centennial volume of Ragnar Frisch (pp. 371-413). Cambridge, UK: Cambridge University Press,
• Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.
• Rappaport, A. (1986). Creating shareholder value. New York: The Free Press.
• Riahi-Belkaoui, A. (1993). The information content of value-added earnings and cash flows. International Journal of Accounting, 28(1), 140-146.
• Rompho, N. (2009). Application of the economic value added (EVA) protocol in a university setting as a capital budgeting tool. Journal of Financial Reporting and Accounting, 7(2), 1-17.
• Schwarz, G. (1978). Estimating the dimension of a model. The Annals of Statistics, 6(2), 461-464.
• Scovell, C. H. (1924). Interest as a cost. New York: Ronald Press Company.
• Shahbaz, M., Ahmad, K., & Asad, M. A. (2011). Exports-led growth hypothesis in Pakistan: further evidence. Asian Economic and Financial Review, Asian Economic and Social Society, 1(3), 182-197.
• Sharpe, W. F. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442.
• Stern, J. M. (1993). Value and people management. Corporate Finance, July, 35-37.
• Stern, J. M., Stewart, G. B., & Chew, D. H. (1996). EVA: an integrated financial management system. European Financial Management, 2(2), 223-245.
• Stewart, G. B., III. (1991). The quest for value. New York: Harper Business.
• Stewart, G. B., III. (2009). EVA momentum: the one ratio that tells the whole story. Journal of Applied Corporate Finance, 21(2), 74-86.
• Stewart, G. B., III. (2013). Best-practice EVA: the definite guide to measuring and maximizing shareholder value. Hoboken, New Jersey: John Wiley & Sons.
• Tully, Shawn (1993). The real key to creating wealth. Fortune, September 20.
• Turvey, C. G., Lake, L., Van Duren, E., & Sparing, D. (2000). The relationship between EVA and the stock market performance of agribusiness firms. Agribusiness, 16(4), 399-416.
• Uyemura, D. G., Kantor, C. C., & Pettit, J. M. (1996). EVA for banks: value creation, risk management, and profitability measurements. Journal of Applied Corporate Finance, 9(2), 94-109.
• Van Horne, J., & Wachowicz, Jr., J. M. (2008). Fundamentals of Financial Management. New York: Prentice-Hall, Inc.
• Villarreal, J., & Córdoba. M. (2010). A consistent methodology for the calculation of the cost of capital in emerging markets. SSRN Electronic Journal, 10.2139/ssrn.1663845.
• Virtanen, K. (1975). Pääoman tuottoasteen hyväksikäyttömahdollisuudet. Tehokas Yritys, 5, 97-113.
• Wallace, J. S. (1997). Adopting residual income-based compensation plans: evidence of effects on managerial actions. Working Paper, University of California, USA.
• White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), 817-838.
• Wirawan, D. I. (2011). Effects of EVA (economic value added), EVA spread, EVA momentum and return on assets on stock return. Ph.D. Thesis, Yogyakarta: Universitas Gadjah Mada.
• Worthington, A. C., & West, T. (2004). Australian evidence concerning the information content of economic value-added. Australian Journal of Management, 29(2), 201-224.
• Young, D. (1998). Groupe Schneider: economic value added and the measurement of financial performance. INSEAD, Fontainebleau, France.
• Zaima, Z. J., Turetsky, J. K., & Cochran, B. (2005). The MVA-EVA relationship: separation of market driven versus firm driven effects. Review of Accounting and Finance, 4(1), 32-49.
• Zimmerman, J. L. (1997). EVA and divisional performance measurement: capturing synergies and other issues. Journal of Applied Corporate Finance, 10(2), 98-109.
• Zimmerman, J. L. (1997). EVA and divisional performance measurement: capturing synergies and other issues. Journal of Applied Corporate Finance, 10(2), 98-109