The Impact of EVA on Share Prices

Abstract

With increasing pressure on firms to deliver shareholder value, there has been a renewed emphasis on devising measures of corporate financial performance and incentive compensation plans that encourage managers to increase shareholder wealth. One professedly recent innovation in the field of internal and external performance measurement is a trade-marked variant of residual income known as economic valueadded (EVA). This paper attempts to provide a synoptic survey of EVA's conceptual underpinnings and the comparatively few empirical analyses of value-added performance measures. Special attention is given to the GAAP-related accounting adjustments involved in EVA-type calculations. The study was conducted to check the impact of EVA on stock returns. To find the relationship between both stock prices and EVA Kse-100 companies were selected as population and out of these, 19 companies were selected as their results were completely available for 5 years (2007 to 2011). Panel regression was run to check the relationship between both. Results from the research shows that EVA over Stock returns is insignificant. There are some other external factors which impact the share prices. EVA is measure, which company performance can be measured but it cannot be used to forecast the Stock returns of the company. Thus, it can be understood that investor do not give so importance to EVA for its investment decision. But after taking share prices lag the level of insignificance was reduced. This shows that share prices are dependent upon their past values, the market is inefficient and effect of every news travels.