Abstract
This research analyzes the influence of Economic Value Added (EVA) and profitability ratios measurement on Indonesian public companies stock returns. The companies are firms that are listed in the Indonesia Stock Exchange (IDX) and that take part in the LQ45 group. The profitability ratios that are used in this research are profit margin (PM), return on sales (ROS), return on equity (ROE), and return on assets (ROA). The aim of this research is to prove the claim that EVA is associated more with company annual stock return rather than profitability ratios. The methodology that is used in this research is a multiple regression test to measure the significance between EVA, profit margin (PM), return on sales (ROS), return on equity (ROE), and return on assets (ROA) with the company annual stock returns. The research result shows that in the end the research prove that EVA does not influence profitability ratios in association with company stock returns. The evidence indicates that profitability ratios are closely associated with company stock returns with the highest significance. More specificly, return on equity (ROE) is the most associated profitability ratio with stock returns followed by return on assets (ROA).
Highlights
Since the modern era of economy, many practitioners and financial guru declare that every company’s main objective is to maximize shareholders wealth, one of them is Brigham and Daves (2004, p5)
If we assume that markets are efficient, we can replace the unobservable value from the discounted cash flow model with the observed market price, and reward or punish managers based upon the performance of the stock
Based on the test that being done, the hypothesis that will be tested in the research is are based on what is the association between economic value added (EVA) and profitability ratios with the company annual stock return in LQ45 companies
Summary
Since the modern era of economy, many practitioners and financial guru declare that every company’s main objective is to maximize shareholders wealth, one of them is Brigham and Daves (2004, p5). If we assume that markets are efficient, we can replace the unobservable value from the discounted cash flow model with the observed market price, and reward or punish managers based upon the performance of the stock. While firms have become more focused on value creation, they have remained suspicious of market gyrations While they might understand the notion of discounted cash flow value, they are unwilling to tie compensation to a value that is based upon dozens of estimates. In this environment, new mechanisms for measuring value that are simple to estimate and use, do not depend too heavily on market movements, and do not require a lot of estimation, find a ready market.
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