The Impact of Economic Value Added & Free Cash Flows on Stock Returns

Abstract

The significance of this study is to understand the impo1tance of factors which help investors \:vhile making investment decision. The \vorth of the company is assessed by the market value of the company. The market value or share price is calculated by using cash flov.. ; s made by the company. This study focuses on discovering the relation between the stock return of a company represented by the share price and the company's performance measures which are based on accounting such as Economic Value Added (EV A) and Free Cash Flows (FCF). These two factors have been chosen as they incorporate the cost of capital of the company \:whereas other traditional accounting measures are not based on cost of capital. The reason to conduct this research is to determine whether investors while investing look for companies which have high EVA and FCF. For attaining the reason or motive of this research. data of 49 companies have been taken from nonfinancial analysis repon by SBP. By calculating the EV A and FCF. inducting statistical techniques of castellation and regression, results were attained. These results are then examined and evaluated by comparing with the academic viewpoint and previous researches. This study reveals that EVA and FCF are weakly capitulated with the stock return. Based on the econometric model, EV A is capitulated with returns of the shares whereas Free cash flows and total assets are not significant. Regression analysis indicates that econometric model is significant.