A Study on the Relationship between Capital Structure and Value Based Performance Measurement Systems: EVA and MVA

THEJO JOSE, ABHISHEK ASHOK

Abstract


In order to maximise value for shareholders, companies should strive towards maximising Market Value. The best way to do so is to maximise the EVA, which highlights a corporation’s ability to earn returns above the cost of capital, which heavily depends on the capital structure. [1]Stewart (1991) defines EVA as follows: “A company’s EVA is the fuel that fires up its MVA.” The popularisation of EVA has opened up new possibilities for investigating the leverage effect of fixed costs and interest in conjunction with EVA. The study aimed at understanding the relationship of EVA and MVA with the capital structure, the extent or degree of influence they have on capital structure and by checking if they are superior to EPS as a standard for deciding capital structure. A total of seventeen companies were taken out from the BSE SENSEX Companies. The variables of the sample companies for the period of 2009 to 2013, making the total sample size of 85, were used for analysis. After studying and evaluating the interlinking relationships of EVA, MVA and EPS as the dependent variables with the Term Debt-Equity (LTDE) Ratio or the capital structure, as the constant or dependent factor, it was found that the VBPM i.e. both EVA and MVA had a significantly negative correlation to the capital structure [2]indicating an indispensable role of capital structure in value increment or decrement. And, the R-squared value showed VBPM having a very significant impact, on the constant factor, whereas, the EPS showed no significant relationship with the constant. This ultimately concludes the great relevance of VBPM: EVA and MVA on Capital Structure over EPS.


[1] Stern, J.M., Stewart, G.B. and Chew, D.H. (1994), “The EVA and Financial Management Systems”, Journal of Applied Corporate Finance, Vol 7 No 2, pp. 32-46

[2] Shahveisi, Farhad, Jamshidi Navid, Babak, Najafi, Yousef and Ali Akbar Hosseini, Seyed (2012), The Study of the Relationship between the Capital Structure and the Variables of the Value-based Performance Assessment, Research Journal of Finance and Accounting, Vol 3, No 7, 2012


References


Stern, J.M., Stewart, G.B. and Chew, D.H. (1994), “The EVA and Financial Management Systems”, Journal of Applied Corporate Finance, Vol 7 No 2, pp. 32-46

Shahveisi, Farhad, Jamshidi Navid, Babak, Najafi, Yousef and Ali Akbar Hosseini, Seyed (2012), The Study of the Relationship between the Capital Structure and the Variables of the Value-based Performance Assessment, Research Journal of Finance and Accounting, Vol 3, No 7, 2012

Wet, JH de and Hall, JH (2004), The relationship between EVA, MVA and leverage,, Meditari Accountancy Research Vol. 12 No. 1, pp 39–59

Chengfeng, Long and Wei, Ma (2012), Discussion of Capital Structure Decision-making Based on EVA Theory, International Conference on Information Management and Engineering (IPCSIT vol. 52)

Modigliani, F. & Miller, M. (1958), The cost of capital, corporation finance, and the theory of investment, American Economic Review, pp 655-669.

Megginson, W.L., Smart S.B. & Graham J.R. (2010), Financial Management, 3rd edition, pp 1-96

Bossert, Anthea H.H. (2012 ), Capital Structure: A Value Based Management Framework in the Healthcare Sector, Mini-dissertation submitted in partial fulfilment of the requirements for the degree Master in Business Administration at the Potchefstroom Campus of the North-West University , April 2012

Stern, J.M., Stewart, G.B. and Chew, D.H. (1994), “The EVA and Financial Management Systems”, Journal of Applied Corporate Finance, Vol 7 No 2, pp. 32-46

Wet, JH de and Hall, JH (2004), The relationship between EVA, MVA and leverage,, Meditari Accountancy Research Vol. 12 No. 1, pp 39–59


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ISSN : 2251-1547