A Study on Economic Value Added and Share Price Behaviour: The Recent Analysis

Abstract

Many companies seem to have destroyed shareholder's wealth over a period of time and only a few have positively contributed to their wealth. With the help of Economic Value Added (EVA) and Market Value Added (MVA) which tell what the institution is doing with investor's hard earned money, this research examines the relationship between the share price and other economic and financial variables such as Economic Value Added (EVA), Return on Asset (ROA) and Return on Fund (ROF). The overriding message of this paper is that the share price has direct correlation between the economic and financial variables. This analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is a prima facie case for using EVA as one of the ranges of performance measurement tools. The relationship between EVA and other traditional measures is examined using Pearson's Coefficient of Correlation. Regression analysis has been used to examine the relationship of EVA, Earning Per Share (EPS), ROA and ROF with share price. The study found that, investing in the market is becoming more and more risky as the beta of the individual securities is increasing year by year. The increase in beta is due to increasing weighted average cost of capital; it specifies that capital is becoming more and more costly; Majority of the banks are increasing their capital to meet the increased expenses. As the market is becoming more and more risky, investors' expectations are increasing and therefore share prices of almost all the banks for almost all the years showed an increasing trend. Data analysis of 39 banks shows that: Share prices of two banks' shows high correlation of coefficient and coefficient of determination with EVA and share prices of eighteen banks' shows low correlation of coefficient and coefficient of determination with EVA. This specifies that there is no relationship between EVA and share price. Keywords: Economic Value, Financial Variables, Share Price, Behaviour and Market Value.