Abstract
This study was made to examine the relationship between Economic Value Added (EVA®) and Market Value Added (MVA) with the reported earnings. Thus, the purpose is to gain better understanding in the use of EVA and MVA in relation to the reported earnings in certain purposes from different regression models. With the sample of 40 Indonesian listed companies in Indonesia Stock Exchange from year 2004 to 2007, the hypothesis testing is used to find the relationships among variables. The author use formula for calculating EVA and MVA to be use in four models of regression analysis against reported earnings. This study found evidence in the relationships between EVA and MVA with reported earnings, and the highest correlation among the models is relationship within the same year period, which can be used for evaluation purposes. Only the relationship of the EVA in the previous year and reported earnings changes is proved not significant. Still, MVA is more significant in explaining its relationship with reported earnings rather than EVA. The author concludes that in general, Indonesian listed companies still produces negative EVA. On the other hand, while the EVA and MVA are proved to have correlation with reported earnings, the result for EVA is lower than MVA. Therefore, there is still not enough evidence that EVA can be used to explain the reported earnings effectively other than MVA.
Highlights
Advancement of the nature of business and management performance has pushed the need of people to build a more effective and structured financial measurement
This study aims in analyzing relationship between Economic Value Added (EVA) and Market Value Added (MVA) with reported earnings using financial statements and other related data from 40 samples of JSX/IDX companies within the time frame
The highest R square is in model 2-a; which shows that 80.60% of the variability in Reported Earnings can be explained by MVA in the same year
Summary
Advancement of the nature of business and management performance has pushed the need of people to build a more effective and structured financial measurement. De Kluyver & Pearce II (2006) stated that EVA is a value-based financial performance measure that focuses on economic value creation, which comes from its use of cost of capital that is generally, refers to financial wealth used to start or maintain the business. In measuring past performance, according to Pettit (2000), EVA is the only operating measure to account for the many income statement balance sheet trade-offs involved in creating value since it simultaneously focuses on both profit and capital. Regarding the company’s present and future performance, it can be seen from many variables, such as stock price performance, reported earnings, or market share of the company
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