Shareholder Activism Reached Unprecedented Levels Accounting Essay

In recent old ages, stockholder activism reached unprecedented degrees and led to increased force per unit area on houses to maximise stockholder value ( Bacidore, Boquist, Milbourn, & A ; Thakor, 1997 ) . However, despite their best attempts, many companies failed to make stockholder wealth. Consulting companies such as Stern Stewart & A ; Company ( EVA ) , Boston Consulting Group ‘s HOLT Value Associates ( cash- flow return on investing: CFROI ) , KPMG Peat Marwick ( economic value direction EVM ) , and Marakon Associates ( discounted economic net incomes: EP ) have developed value-based public presentation steps in order to get the better of the defects of traditional accounting public presentation steps ( Biddle, Bowen, & A ; Wallace, 1997 ) . The most popular value-based public presentation step is Stern Stewart ‘s Economic Value Added ( EVA ) .

Corporate directors and the concern imperativeness have shown great involvement in the usage of EVA as a step of public presentation. This new metric is a net income step based on the true economic income. The chief characteristic of EVA step is that, unlike traditional accounting steps, it reduces income by a charge for the cost of capital that includes the cost of the equity capital provided by proprietors. This charge has long been included in certain traditional steps of income that mainstream economic experts have used for more than a century ( McIntyre, 1999 ) . A company ‘s value is created merely when the return on the invested capital is higher than its cost of capital. The antonym is besides true. When the return on the invested capital is less than the cost of capital, a houses ‘ value is undermined. EVA has gained widespread credence and credibleness non merely as an operational public presentation metric, but besides as a manner in which direction ‘s determinations contribute value to an organisation. It has even been predicted by Zarowin ( 1995 ) that EVA may replace Net incomes per Share ( EPS ) in The Wall Street Journal ‘s regular stock and net incomes studies. Specifically, EVA has been used as a direction compensation tool and for direction decision-making in capital budgeting. Fiscal investing houses are trusting upon EVA to find the best companies in which to put. Stewart ( 1991 ) argued that such traditional steps as net incomes, net incomes per portion ( EPS ) , return on equity ( ROE ) , and return on investing ( ROI ) are misdirecting steps of corporate public presentation. EVA, in contrast, is what drives stock monetary values and is conspicuous as the individual best step of wealth creative activity ( Stewart, 1994 ) .

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Despite broad involvement in EVA, there is a famine of empirical grounds on the efficaciousness of this step versus other steps of house public presentation in the banking industry. The relevancy of this alternate public presentation measuring to traditional accounting measuring has non been to the full explored. Academic research has non established EVA ‘s correlativity to market value and stock returns. The grounds from old surveies is assorted and has non resolved the argument over public presentation steps.

The aim of this survey is to look into whether EVA is a better forecaster than presently mandated public presentation steps, net incomes per portion ( EPS ) , return on equity ( ROE ) , return on investing ( ROI ) net income after revenue enhancement ( PAT ) , and return on net worth ( RONW ) in explicating the market value of banking houses in India. EVA has been compared to traditional accounting public presentation steps. The balance of this article is organized as follows, computation of EVA for Bankss, sum-up of empirical surveies, the acceptance of EVA technique in the banking industry, the hypotheses, and the methodological analysis, followed by empirical consequences, decisions, and restrictions and suggestions for future research.

Economic Value Added ( EVA ) for Banks: EVA expresses the excess value created by a company in a given period, i.e. the house ‘s net income cyberspace of the cost of all capital. This step is computed as the merchandise of the difference between the return on investing and its composite funding cost ( i.e. extra return ) and the capital invested.

EVA = Capital Invested* ( Return on Capital Invested- Cost of Capital )

= ( Capital Invested*Return on Capital Invested ) – ( Capital Invested* Cost

of Capital )

= NOPAT – ( Capital Invested*Cost of Capital )

As noted in Velez-Pareja ( 2000 ) , when EVA is used to measure company public presentation in a given period, capital invested and NOPAT should non be calculated for the same period. As investors expect to have returns on the investing made in the beginning ( and non on the cumulative sum at the terminal of the period ) , stockholders compare returns ( i.e. NOPAT ) earned over the period with the capital invested in the beginning ( and non at the terminal ) of the period. For this ground, capital invested is measured with a slowdown of one twelvemonth and EVA is calculated as follow:

EVAt =NOPATt – ( Capitalt-1 * Cost of Capital )

Where:

EVAt = EVA of period T

NOPATt = NOPAT of period T

Capital Investedt-1 = Capital Invested step at the period of t-1

NOPAT and capital invested can non be calculated on an accounting footing, but need to be calculated on an economic footing. Advocates of EVA have identified more than 160 accounting accommodations, but it is unrealistic even to believe of doing all these accommodations for any individual company. In the empirical probe, we calculate a “ disclosed EVA ” , which EVA is obtained after doing some standard accommodations to publically available accounting informations. The computation of EVA requires, in fact, to show NOPAT and capital invested on an economic footing, for this ground, advocators of EVA suggest some accommodations in order to:

Avoid commixture of operating and funding determinations ;

Supply a long term position ;

Avoid commixture of flow and stock ;

Convert GAAP accrual points to a cash-flow footing or, in other instances, convert GAAP cash-flow points to add-ons to capital.

Adjustments: In ciphering EVA, seven accommodations have been carried out refering the undermentioned points:

Loan loss proviso and Loan loss modesty: Loan loss modesty is a modesty taking to cover any future loan losingss, for this ground, it should be equal to the net present value of all future loan losingss. In any individual period, this modesty is reduced by net charge-off ( i.e. the current period losingss due to recognition hazard ) and replenished by loan loss commissariats ( i.e. the proviso made in the current period to set the modesty both for preexistent loans and for estimated hereafter loan losingss related to freshly originated loans ) .

This convention is surely applaudable from a direction position since it implies that all loan losingss are pre-funded out of current net incomes. However, loan losingss commissariats are normally used to pull off net incomes: if a bank achieves high runing returns, bank directors tend to overrate this proviso, while they are inclined to undervalue it if operating net incomes are hapless. This accounting pattern introduces an of import deformation in analysing bank public presentation since it smoothes net incomes. Business is hazardous, and the volatility of net incomes is a manifestation of this hazard, for intents of economic public presentation rating, smoothening net incomes is inappropriate.

Taxs: Most Bankss show important and relentless differences between book revenue enhancement commissariats and hard currency revenue enhancement payments. Since these differences are quasi-permanent, deferred revenue enhancements should be considered as capital and, likewise to loan loss commissariats, revenue enhancements need to be considered as current period disbursals for intents of economic public presentation rating.

Restructuring charges: Over the last decennary, many Bankss have carried out reconstituting programs in order to better their operating efficiency. To the extent that such restructuring charges represent disinvestments, these costs should be treated as a capital decrease instead than costs ( and hence cut down NOPAT ) . Since handiness of informations do non let us to measure the extent of existent disinvestments due to restructuring charges, these costs are omitted when seting NOPAT and capital invested.

Security accounting: In many states ( such us U.S. , Italy, France and U.K ) , “ available for sale securities ” ( AFSS ) are marked to market through the capital histories. From an economic position, nevertheless, one might claim that selling a security, with a voucher below ( or supra ) the current market output and utilizing the returns to replace it with a current market output security is a nothing amount game. In measuring the economic public presentation of a bank, it is hence more accurate to take from NOPAT the consequence due to additions and losingss on sale of AFSS: these additions and losingss should be amortized against NOPAT over the staying lives of the securities. However, since informations on the staying lives of the securities are non available and a sensible premise can non be made, these costs are omitted seting NOPAT. Capital additions and losingss generated taging to market AFSS ( instead than past capital additions and losingss amortized in the period T ) are hence considered as a portion of NOPAT.

General hazard modesty: This accommodation aims to rectify the deformations derived by the “ general hazard modesty ” , a standard characteristic for Italian Bankss. This proviso is a modesty taking to cover a bank ‘s future generic loan loss in any individual period ; this modesty is reduced by net charge-off ( i.e. the current period losingss ) and replenished by general hazard commissariats ( i.e. the proviso made in the current period to set the modesty harmonizing to the bank ‘s hazards ) . Similarly to the loan loss modesty, this convention is surely applaudable from a direction prospective, but it is used in an timeserving mode. This accounting pattern introduces an of import deformation in analysing Bankss ‘ public presentation since it smoothes net incomes.

Research and Development ( R & A ; D ) costs and developing costs: i.e. disbursals designed to bring forth future growing. Current assets do non profit from these disbursals and it would be wrong to cut down runing income by the sum of these disbursals. However, GAAP requires companies to handle all spendings for R & A ; D as operating disbursals in the income statement. As a effect, it is appropriate to rectify this accounting deformation by sing runing income without these disbursals.

Operating rental disbursals: These are cloaked fiscal disbursals.

Before traveling on with the EVA computation, it is necessary to exactly specify how capital invested and cost of capital should be measured for commercial Bankss. Many surveies ( e.g. Velez-Pareja 2000 ) step book value of capital utilizing entire assets and, hence, mensurate the cost of invested capital as Leaden Average Cost of Capital ( WACC ) . While this solution is surely accurate for non- banking companies, this process would be misdirecting for commercial Bankss. Since fiscal intermediation is the nucleus concern for Bankss, debts can non be merely considered as a funding beginning ( as for other companies ) , since they truly are productive inputs ( as the work force, IT assets, etc ) . This position is besides confirmed when analysing NOPAT ‘s significance. In non-banking companies, involvement costs are non considered in NOPAT because these are non runing costs, but fiscal disbursals. However, a bank ‘s operating costs chiefly derive from involvement disbursals because fiscal

Intermediation is the bank ‘s nucleus concern. As a effect, if the capital charge is calculated using WACC on entire assets ( as normally done for non-banking companies ) , EVA will be biased since it will be obtained numbering twice the charge on debt:

Subtracting from NOPAT a capital charge on the overall capital ( equity and debt ) invested in the bank ;

Calculating NOPAT, when involvement disbursals ( i.e. the charge on debt capital ) are subtracted from runing grosss.

For these grounds, our advice is to concentrate on equity capital and step the capital invested in the bank as the book value of stockholder equity. Sing the cost of capital, the capital charge can non be obtained using the bank ‘s WACC on the capital invested because the latter is given by the equity capital and non by the overall capital ( debt and equity ) . Consequently, a commercial bank ‘s cost of capital invested should be measured by the cost of equity. To back up this position, Sironi ( 1999 ) identifies four differences ( labelled as “ the separation rule ” , “ Bankss as suppliers of liquidness services ” , “ capital ratios ” , “ off-balance sheet pro ” ) between a bank ‘s cost of capital and that of a non fiscal company, and observes “ with a capital construction exogenously determined by regulators, a fringy cost of debt stopping point to that gettable from the inter-bank market, and comparatively similar to that of all other major Bankss, and an array of merchandises that do non necessitate any debt funding, Bankss should look at their cost of equity capital as a key variable ” . The cost of equity is estimated utilizing the Capital Asset Pricing Model ( CAPM ) looking at investors ‘ expected return.

A speedy glimpse at consequences in empirical surveies

Most of the surveies covering with value base direction ( VBM ) have investigated the information contents of the advanced public presentation steps ( particularly EVA, the most popular ) over the traditional steps ( i.e. ROE, ROA, Net Income, etc ) . In other words, there is a turning figure of surveies look intoing which public presentation step is the most suited to maximise value of concern.

The grounds environing this issue is assorted and these surveies can be divided in two groups: those carried out by EVA boosters and those carried out by faculty members. As stated in Lehen and Makhija ( 1997, p. 90 ) , “ EVA is seen by its advocates as supplying the most dependable year-to-year index of a market-based public presentation step known as Market Value Added aˆ¦ Despite broad involvement in EVA, small is known through empirical observation about the efficaciousness of this step versus other steps of performanceaˆ¦ The grounds from these surveies is assorted, nevertheless, and has non be resolved the argument over public presentation steps ” .

Sing the practician literature, these surveies normally observed the EVA high quality since EVA is found to better explicate stock returns and house values. As noted in Garvey and Milbourn ( 2000, p.211 ) , “ Stern Stewart, Boston Consulting Group, and LEK/Alcar make the claim that their proprietary public presentation step correlates more closely with stock returns than do either traditional accounting steps or the steps of rival houses, allegedly doing it a more desirable compensation tool ” .

O’Byrne ( 1996 ) : analyses industrial companies and found the EVA high quality in a two-step analysis. In the first, the house market value was regressed on EVA and so on net incomes ( viz. , NOPAT ) : O’Byrne ( 1996 ) found an adjusted R2 of 0.31 and 0.33 for EVA and NOPAT severally. In the 2nd measure of the analysis, a set of accommodations were proposed: foremost, EVA separate coefficients were allowed for positive and negative value of EVA ; secondly, the natural log of capital was introduced as forecaster in order to take into history differences in the manner the market value house of different sizes ; thirdly, 57 silent persons variables were introduced to see possible industry effects. In this 2nd phase, he found an R2 of 0.56 for EVA, which enable him to reason that EVA is superior to net incomes in explicating steadfast value.

Al Ehrbar ( 1998 ) : studies that several empirical analyses have been carried out by Stern Stewart utilizing the Performance 1000 database. Harmonizing to the Stewart findings, EVA explains half of the volatility in companies ‘ MVA, the highest correlativity found.

Uyemura et al. , ( 1996 ) : a peculiarly interesting survey for our intents since its focal point is on banking analyzed the largest 100 U.S. bank keeping companies over a period of 10 old ages ( 1986-95 ) . By regressing alterations in standardised MVA against alterations in standardised EVA ( defined as EVA divided by capital ) and traditional public presentation steps, EVA was found to hold the highest correlativity with MVA.

Table -1: Uyemura et. EL. ( 1996 ) consequences

Variable

Alpha

Beta

R2

Standard Error

EVA

186

( 26 )

3.40

( 0.14 )

40 %

757

ROA

-435

( 59 )

62018

( 54290

13 %

912

Roe

-309

( 56 )

3581

( 367 )

10 %

928

Net Income

19

( 35 )

0.75

( 0.09 )

8 %

938

EPS

-179

( 45 )

76

( 11 )

6 %

950

Beginning: Uyemura et. EL. ( 1996, p.99 ) consequences

Concentrating on surveies proposed by faculty members, the high quality of EVA is normally non verified. In item:

Peterson and Peterson ( 1996 ) : analyzed traditional and value-added steps of public presentation and compared them with stock returns. Harmonizing to their findings, traditional steps are non through empirical observation less related to stock returns than return on capital: as consequence, traditional steps should be non eliminated as a agency of measuring public presentation, though these have no theoretical entreaty. From this point of position, Peterson and Peterson ( 1996 ) regulation out the possibility of value added steps non being worthwhile: since value added steps concentrate on economic instead than accounting net income, these play an of import function in measuring public presentation because directors will take towards value creative activity instead than mere use of short-sighted accounting figures.

Biddle et al. , ( 1997 and 1999 ) : analyzed a sample of 6174 firm-years over the period 1984-93 by comparing adjusted R2 obtained regressing stock market adjusted returns against EVA, Residual Income ( RI ) , accounting net incomes ( viz. , Gaining Before Extraordinary Item – EBEI ) and Operating Cash Flow ( CFO ) . Harmonizing to their consequences, EBEI has the highest adjusted R2 and EVA has a smaller adjusted R2: these consequences do non back up the hypothesis that EVA dominates traditional public presentation step in its association with stock market returns. In add-on, Biddle et al. , ( 1997 and 1999 ) besides assessed the relationship between public presentation steps and house value by retroflexing O’Byrne ‘s ( 1996 ) survey with some accommodations. In order to level the playing field, Biddle et al. , ( 1999 ) extended the accommodation proposed in the 2nd phase of O’Byrne ‘s ( 1996 ) analysis to the arrested developments run against NOPAT: in this instance, the EVA high quality disappears. In fact, harmonizing to their consequences, accounting net incomes have the highest adjusted R2 ( 0.53 ) , EVA has an adjusted R2 of 0.50 and NOPAT has an adjusted R2 of 0.49. These consequences suggest that EVA does non rule accounting net incomes in explicating house values.

Lehen and Makhija ( 1997 ) : buttocks which public presentation step does the best occupation of foretelling the turnover of Chief Executive Officer ( CEO ) . Concentrating on the grade of correlativity between different public presentation steps and stock market returns, they found that correlativity coefficients vary between 0.39 and 0.76. In item, EVA and MVA are the most extremely correlative step with stock market returns: 0.59 and 0.58 ( severally ) . The other public presentation steps have smaller correlativities: 0.455 for ROA, 0.455 ROE and ROS 0.388. It is interesting to observe that, likewise from all other surveies where MVA was used as response variable, the step largely correlated with MVA is EVA.

Garvey and Milbourn ( 2000 ) : assessed the “ declared ” EVA high quality by concentrating on the suitableness of EVA and gaining to the direction compensation system. This paper adds a different strain to the academic literature, since Garvey and Milbourn ( 2000 ) ab initio criticise the probe techniques used antecedently ( i.e. the statistical correlativity with stock returns and/or steadfast value ) . They suggest that a strong statistical correlativity with stock returns does non set up ( a priori ) that a public presentation step adds value to a compensation system. In order to specify the standards for judging the value alternate public presentation steps, they proposed:

A theoretical analysis developing a criterion bureau theoretical account with a principal and one agent: Garvey and Milbourn ( 2000 ) concluded that it is irrelevant to look into whether EVA round gaining per Se, while it would be more accurate investigate under what fortunes EVA beat net incomes ( and for what grounds ) ;

An empirical probe by proving the theoretical account in Paul ( 1992 ) to verify the theoretical theoretical account. In item, Garvey and Milbourn ( 2000 ) analysed the fringy value of EVA acceptance for each company ( utilizing the estimated correlativities among gaining, EVA and monetary values ) and tie in this to the house ‘s EVA acceptance ( utilizing a multivariate arrested development attack ) . Garvey and Milbourn ( 2000, p. 241 ) found that the “ accounting steps continue to explicate alterations in compensation even when stock returns are used as explanatory variable. This is consistent with the Paul ( 1992 ) theoretical account in that houses do non utilize precisely the same weights as the stock market in finding compensation aˆ¦ More surprisingly, we show that the seemingly simplistic thought of comparing the comparative ability of alternate steps to explicate stock returns is both theoretically defendable and a sensible representation of pattern. Therefore, houses contemplating the acceptance of EVA would be good advised to get down with an scrutiny of EVA ‘s R2 with its stock returns ” .

Acheampong Y.J. , Wetzstein M.E. ( 2001 ) propose an advanced type of analysis utilizing parametric methods for gauging efficiency, concentrating on the nutrient industry. They conclude that: “ the analysis showed that there are no important differences between traditional and value added steps of public presentation ” .

On the footing of the surveies above summarised, it appears that:

All surveies carried out by practicians found that EVA dominates traditional steps in explicating stock returns and house values ;

Surveies carried out by faculty members found that traditional steps are non through empirical observation less related to stock returns than EVA and other value added steps ;

Garvey and Milbourn ( 2000 ) proposed a theoretical and empirical attack well different from all other surveies. Although this part is really interesting, it appears to hold a different focal point because it compares EVA and gaining as a footing for compensation systems instead than public presentation steps. In add-on, it concludes that companies contemplating the acceptance of EVA should ( first of all ) assess the EVA ‘s R2 with its stock returns ;

Although these surveies adopted rather similar probe techniques, the variables adopted ( as forecasters, but particularly as response variables ) are heterogenous. Some surveies [ such as O’Byrne ( 1996 ) , Peterson and Peterson ( 1996 ) and Biddle et al. , ( 1997 and 1999 ) ] effort to measure different public presentation steps, including accounting net incomes and residuary income steps such as EVA, by analyzing their grade of correlativity with stock returns on the land that the best step is the most extremely correlated with stock returns. Some other surveies [ Al Ehrbar ( 1998 ) and Uyemura et Al, ( 1996 ) ] and compared fiscal steps looking at the grade of correlativity with the MVA, considered by EVA boosters the “ ultimate step of stockholder wealth creative activity ” .

RESEARCH METHODOLOGY

Hypothesiss

The primary intent of this survey is to supply empirical grounds on the comparative and incremental information content of EVA and traditional public presentation steps. Relative information content comparings analyze if one step provides greater information content than another. Incremental information content comparings assess whether one step provides more information content than another. The first hypothesis tests the averment that EVA dominates traditional public presentation steps in explicating house values. Stewart ( 1994 ) argues that EVA is better than its traditional public presentation steps in explicating alterations in stockholder wealth.

Hypothesis 1: The comparative information content of EVA is superior to mandated public presentation steps, net incomes per portion ( EPS ) , return on equity ( ROE ) , return on investing ( ROI ) net income after revenue enhancement ( PAT ) , and return on net worth ( RONW ) in explicating values of banking companies.

The comparative information content investigates which variables ( EVA, ROA, ROI, EPS, and RONW ) have greater association with house value. The conventional manner of measuring the comparative information content is to compare the coefficients of finding ( R2 ) of assorted simple arrested developments that analyze the relation between assorted public presentation steps and equity market value.

The 2nd hypothesis refers to the incremental information content.

Hypothesis 2: EVA adds information content to that provided by EVA, ROA, ROI, EPS, and RONW. To measure incremental information content one analyzes the addition in the R2 that arises from the inclusion of more variables in the theoretical account.

Data Collection and Sample

This survey used secondary informations, which were collected from CMIE ‘s ( Centre for Monitoring Indian Economy ) PROWESS database. The information required for this research included accounting information to deduce EVA every bit good as traditional variables. These traditional accounting steps were selected based on the findings of old surveies that tested the relationship between EVA and accounting public presentation steps.

The sample for this survey consisted of 38 publically traded Bankss ( public and private sector ) . Banks that did non hold informations for the full period of 1996 to 2006 were eliminated from the analysis. The entire figure of Bankss with the Centre for Monitoring Indian Economy are 134 was reduced to 38, which are listed on National Stock Exchange, Bombay, whereas the figure of Bankss with the informations of full period ( 1996-2006 ) was reduced to 20.

Variables of Study

To transform accounting income into economic income ( NOPAT ) , some of the accommodations were adapted from Johnson ( 2001 ) , Calaberese ( 1999 ) and Stewart ( 1991 ) . Except for estimated income revenue enhancements, other recommended accommodations such as the LIFO militias, the bad debt militias, and capitalized R & A ; D were immaterial or unavailable. For the intent of this survey, merely estimated income revenue enhancements, which are measured as income revenue enhancements collectible in PROWESS database, were adjusted from operating net income to deduce NOPAT. To deduce invested capital, interest-bearing debt and deferred income revenue enhancements are added to stockholder ‘s equity. However, PROWESS database does non supply the information of other accumulated goodwill amortisation.

To cipher a bank ‘s weighted-average cost of capital, the undermentioned variables were operationalied. The 364 yearss Indian Treasury measure ‘s rate obtained from Reserve Bank of India database was used as a placeholder of a riskless rate. There is a go oning difference over what that premium should be and whether it should be derived from the arithmetic or geometric mean of this spread over clip. Most service companies use a hazard premium { I?i* [ E ( rm ) -rf ] } of about 7 % ( Johnson, 2001 ) . Following Stewart ‘s ( 1991 ) methodological analysis, 6 % of the market-risk premium is used for the computation of the cost of equity.

To avoid the ambiguity for the market hazard premium we used calculated beta ( B ) as:

I?i = COVim/i„† 2m

Where:

I?i = The beta of security in inquiry.

COVim = Stands for covariance between the return of security and return of

market portfolio.

i„† 2m = Stands for discrepancy of market portfolio.

Than replacing the values in the equation suggested in Capital Asset Pricing Model ( CAPM )

Eri = rf+ I?i [ E ( rm ) -rf ]

Where

E ( rm ) = Expected return on market portfolio.

Eri = Expected or minimum needed rate of return on security I.

releasing factor = Risk free rate of return ( 364 yearss Treasury measure rates ) .

I?i = Systematic hazard of security I, beta.

To prove the truth of EVA computation method described above, EVA information from the Stern Stewart ( BT-500 ) with all necessary accommodations are compared with EVA calculated in Business Today ‘s survey. The Pearson correlativity coefficients between these two sets of informations for the full period of 1995 to 2001 showed high correlativity with mean correlativity coefficients of.76 at the important at one per buzzword. Therefore, we can safely reason that the estimated EVA in this survey has important, positive association with Stern Stewart ‘s estimated EVA.

The EVA Regression Models

To prove the prognostic power of EVA comparative to return on assets ( ROA ) , return on investing ( ROI ) , gaining per portion ( EPS ) , and return on net worth ( RONW ) , five separate simple additive arrested development theoretical accounts were developed to analyze the relationship between a company ‘s market value and traditional public presentation steps. The EVA theoretical account would show a banking company ‘s market value as a additive map of five independent variables ( EVA, ROA, ROI, EPS, and RONW ) .

To prove Hypothesis 1 sing the comparative information content of EVC, RAC, RIC, EPC, and RWC that were all standardized by capital, the following five additive arrested development theoretical accounts were estimated.

MVc = a0 + a1 EVC +e

MVc = a0 + a1 RAC +e

MVc = a0 + a1 RIC + vitamin E

MVc = a0 + a1 EPC + vitamin E

MVc = a0 + a1 RWC +e

Where

a0 = Constant.

MVc = Market value of equity/capital.

EVC = Economic Value Added/ capital.

RAC = Return on assets/ capital.

RIC = Return on investing / capital.

EPC = Earning per share/ capital.

RWC = Return on net worth/ capital.

vitamin E = the error term of arrested development.

To prove Hypothesis 2 sing the information content of EVc, RAc, RIc, EPc and RWc the undermentioned multiple additive arrested development theoretical accounts is presented as follows:

MVc = a0 +a1 EVc +a2 RAc + a3 RIc + a4 EPc + a5 RWc + vitamin E