Flexibility in Measuring Corporate Financial Performance, EVA Versus Conventional Earnings Measures: Evidences from India and China

Abstract

The paper empirically explores on the potential of economic value added (EVA), a value-based performance benchmark as an option to conventional earnings measures, with focus on two Asian emerging economies: India and China. Panel regression method has been adopted to compare the significance of EVA over return on equity (ROE), return on capital employed (ROCE) and earnings per share (EPS), in explaining and forecasting market value added (MVA), a proxy for shareholders’ wealth creation. The research uses data spanning 15 years (2002–2016) of 260 Indian and 254 Chinese non-finance companies. Moreover, the regression models are first estimated in-sample period (2002–2011) and then tested for predictability over the period 2012–2016 (out-of-sample period). The results indicate a positive and significant relationship between EVA and MVA, next only to ROCE, with an ability to forecast MVA for India. In contrast, EVA does not emerge as a consequential performance measure with EPS dominating the performance measurement space for China. Notwithstanding, EVA in conjunction with ROCE provides incremental explanation to variations in MVA for Chinese firms. Further, the study highlights the negative relationship of EVA with the value creation by Chinese firms, in spite of the fact that China has witnessed a substantially higher annual GDP growth rate over the period 2002–2014, in comparison with India, one of the plausible reasons that it is now observing a slowdown. In sum, EVA depicts a more credible picture of the industrial contribution in the economic growth of India and China.