Indian Banking and Information Content of EVA and Traditional Measures

Abstract

The rationale behind the study lies in the facts that about superiority of EVA over traditional matrices is mixed and were focused on manufacturing sectors. Hence, relationship between the Market Value Added (MVA), EVA, and accounting performance measures such as net earnings (PAT), earning per share (EPS), return on investment (ROI), return on net worth (RONW), and return on capital employed, Economic Value Added (EVA), and Market value Added (MVA) has not been grossly researched to Indian Banking Sector. The data has been collected through most worthy ‘PROWESS’ database of Centre for monitoring Indian Economy (CMIE). The reference period of the study is fourteen financial years i.e. 2000-2013.The multiple regression and Biddle’s et. al. (1997), Bao and Bao (1998) approach is selected for studying relative and incremental informational of EVA vis-a-vis other traditional financial performance measures. The result of cross-section regression reveals that earning (PAT) having highest explanatory power than EVA, ROI and EPS to explain market value added by sample banks. Fourth, the relative and incremental informational test present that The PAT having highest relative explanatory (66.7 percent) power do explain market value added as compared to EVA, ROI, EPS, ROCE alone and the relative informational content of EVA is lower than PAT, which, accounting for only 57.4 present of variation in market value added (MVA). Thus, the usefulness of EVA for decision making can’t be ruled out based on the results and it can be used as an internal as well as external performance measurer. As Solomon (1965) suggested that residual income be used as an internal performance measure and Anthony (1973, 1982, and 1982) suggested that it is suitable to measure external performance.