Linkage between Economic Value Added and Market Value: An Analysis

Maximizing shareholder value has become the new corporate paradigm. Corporations in the US have started disclosing EVA information from the beginning of 90s as a measure of corporate performance. It is believed that market value of a firm (hence shareholder wealth) would increase with the increase in EVA. Various studies done in the US also confirm this belief. EVA (a term coined and registered by Stern Stewart & Co. New York) is a residual income that subtracts the cost of capital from the operating profits generated by a business. The present study makes an at tempt to find the relevance of Stewart's claim that market value of the firm is largely driven by its EVA generating capacity in the Indian context. Based on a sample of 200 firms over a period of five years, the study shows that market value of a firm can be well predicted by estimated future EVA streams. The study has also found that market value of most of the firms in the sample is explained more by current operational value than future growth value of firms.