Corporations continue to use a variety of measures to gauge their financial performance for many years. Economic value added (EVA) has been introduced as a very effective performance measurement and strategic assessment tool. One of the reasons why EVA is such a powerful instrument is that it is linked to market value added (MBA), which is the definite indicator of a company’s wealth creation. Another reason for using EVA is that it is the only dependable and precise continuous improvement method available.
Economic value added is the term that Stern Stewart & Co. Coined for its particular variety of economic profit and gain that remains after levying a charge against “After Tax Operating Profits” for the opportunity cost of all capital used to produce those profits. Many corporate managers have mistakenly been focusing on conventional accounting profits, which include a deduction for interest payments on debt but have no provision at all for the cost of equity capital. Market value added measures the level of wealth creation.
It beats out all other assures because it is the difference between “Cash In and Cash Out”, I. E. , between how much capital investors put into a company and what they could get out by selling at today’s market price. As such, MBA is the cumulative amount by which a company has enhanced or diminished shareholder wealth. It is the best external measure of company performance because it captures the market’s assessment of the effectiveness in how company’s managers have used their resources.
Within the scope of this study, the role of economic value added in financial theory, ND the relationship between market value added, market value and economic value added have been investigated. Empirical study around the market value added, market value, economic value added, traditional measures such as net income, earnings per share, return on assets and return on equity have been employed with the data taken from 89 Istanbul Stock Exchange companies, over a period 1996 – 2005.
Additionally, Regression and Factor Analysis are applied to find the high performance firms and industries as well as value drivers pertaining the firms taken p in this study. It has been determined that market value and market value added have lower association with economic value added in comparison to the measures of earnings such as net operating profit after tax and net income. Moreover, when the annual changes in the variables are taken into consideration, association level of EVA to MBA and NV is weaker than the net operating profit after tax and net income.
However, economic value added is a more powerful management tool than traditional reference measures like earnings per share, return on assets and return on equity in measuring firm financial performance in SIS regarding the period of 1996 – 2005. Moreover, in order to determine the value drivers in Istanbul Stock Exchange economic vale added By hairy financial characteristics have been investigated. A weak correlation between market value added, market value and internal financial measures were determined.
The impact of macroeconomic factors on the market value added and market value has also been investigated. It has been concluded that inflation and treasury bill rates have a negative correlation, while gross domestic/national product and money supply/net international reserves have a positive correlation with market value added and market value of the Istanbul Stock Exchange industrial firms. Furthermore, Porter’s value philosophy has been discussed to investigate the competitiveness and value creation of Turkish companies and industries. Keywords: Market value added, market value, economic value added