The study of relationship between shareholder values added (sva) and different criteria of the risk adjusted return

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1 Internatonal Research Journal of Appled and Basc Scences 2013 Avalable onlne at ISSN X / Vol, 5 (9): Scence Explorer Publcatons The study of relatonshp between shareholder values added (sva) and dfferent crtera of the rsk adjusted return Mohammad norouz 1, Mahmoud samad 2 1. Ma student of accountn Accountng department Scence and research branch Islamc azad unversty Gulan, ran 2. assstant professor Accountng department Islamc azad unversty Tonekabon, ran Correspondng Author emal: M_samad_largan@yahoo.com, mnorouz_un@yahoo.com ABSTRACT: Nowadays shareholders are expected to obtan nformaton about the frm's proftablty, current and future lqudty status of frms, potental of makng ncome, sustaned growth of the company and ts rsk analyss through relable ndcators. Hence new metrcs s proposed to measure the value of a frm that s quckly replacng tradtonal crtera and ndcators of evaluatng of frms. Accordngly, some crtera were expressed based on economc theory that one of them s shareholder value added. Ths study attempts to fnd the nformaton content of shareholder value added and dfferent crtera of the rsk adjusted return durng 2007 to 2011 for 200 companes lsted n tehran stock exchange. The results ndcate that the relatonshp between shareholder value added and total rsk adjusted return was negatve relatonshp by ntegrated regresson model (panel data) and usng evews 7 software. Also relatonshp between shareholder value added and systematc rsk-adjusted return was poor correlaton ntensty, despte the adopton of a negatve relatonshp between them and the relatonshp between shareholder value added and excess return was not accepted. Keywords: Return, rsk, shareholder value added, stock. INTRODUCTION Lohman et al (2004) beleve that performance evaluaton (the tools of strategc mplementaton and montor dong work properly) s an actvty that management to do t to acheve ther goals and strateges. Selecton of crtera for performance evaluaton and achevng to company goals usng ths measure has led to the selecton crtera s very mportant. Development and mprovement of performance evaluaton crtera as an mportant part of the value chan s one of the man tasks of management accountng. Vald and relable performance evaluaton crtera wll allow the company that get nto ther strateges and objectves effcently. Managers and Researchers are tryng to mprove the management and control of the value chan usng dfferent solutons such as performance evaluaton models (gooyandeh, 2007). The man role of management n new organzatons s to create value for all ndvduals and nsttutons whch search for ther nterests n the organzaton. From among the benefcares of every organzaton and entty whch ental stockholders, customers, staffs, goods supplers, socety and governmental referents, the stockholders are especally mportant due to ther prncpal role n job creaton and formng the entty (nkomaram & asgar, 2006). On the other hand we cannot study dfferent nvestment resolutons wthout consderng the rsk and only through return and thus we adjust return based on the rsk to assess nvestment approprately (jahankhan & zarffard, 1995). The researchers and scholars n fnance and accountng have done many studes regardng value creaton and have posed dfferent approaches for decson makng for the nvestors to help nvestors to use these tools and crtera to acheve ther objectves. It s clear that the tradtonal crtera do not have the capablty of predctng future and remove the nformaton needs of the users but they solely present some nformaton for the nvestors whch may devate them n decson makngs. Currently the performance assessment of most companes and organzatons s carred out based on fnancal (tradtonal) crtera (young & byrne, 2001). Although these methods are stll practcally utlzed they are not very sutable for assessng the performance of managers because proftablty has a close relatonshp wth the amount of nvestment and none

2 of these tradtonal methods care about the amount of nvestment. In summary, the novel crtera for performance Assessment have a close relatonshp wth the value of stockholders. These crtera reflect the future trends because the nvestors and market expect nflaton to affect the rsk and money value all the tme. The novel crtera, as a pattern, are capable to create value for the stockholders n a company from one perod to the other (hovezakova, 2010). In the present research we wll focus on one of the crtera based on value, shareholder value added (sva) and the study of relatonshp between these crtera and dfferent crtera of the rsk adjusted return (rvar, rvol, α) to help stockholders to make proper decsons by usng the most approprate performance assessment crtera. If the relatons above are proved the results of ths study wll lead to ntroduce an approprate crteron for performance assessment. Ths wll be related to stock return on one hand and t wll represent the wealth created for the stockholders on the other hand whch help them greatly to make decsons better regardng the purchase or sales of stocks or makng decsons to nvest n companes and also assess the effcency of management. Due to the growth of bourse n ran durng recent years and consderng the prncple 44 of the consttuton of ran our country s movng towards prvatzaton. Meanwhle, the bourse market n ran stll needs to progress and develop to be a safe place for nvestment and acceptance of nvestment. Besdes that the fnancal managers who are consdered as the man body of decson makng n companes have a lot of problems n ths area to ncrease the wealth of ther stockholders. On the other hand, the stockholders try every day to purchase those stocks whch have the least rsk for them wth the hghest returns. These factors force them to choose from among the Present companes. The results of ths study wll be helpful n recognzng the behavors of economc unts actve n tehran stock exchange and the results of utlzng sva wll be consdered as a crteron n assessng the performance of managers of the companes and ts role n ncreasng the wealth of stockholders wll be great. Revew of lterature Monks(1996) examned necessty of legal shareholder value added n governmental structures wth the concept of value-added applcatons and ther shareholders, so that leads to successful results of ncreasng shareholders wealth. Rahnamay-e-roodposht et al (2009) surveyed the ndexes of value management for shareholders n tehran stock exchange durng 2001 to 2006 for metal ndustry. They was assessed performance evaluaton usng value based management (such as economc and market value added) wth shareholder value added. Results of the study ndcated there s a sgnfcant relatonshp between these varables and stockholder valueadded. As a result, economc and market value added were evaluated good predctor varables for dentfyng and measurng of shareholder value added. Kavyan and samad(2011) examned the concept of shareholder value added applcaton n the fnancal makng decsons and concluded that shareholder value added as a separate crteron from another value-based crtera, can explan shareholder returns, so that wth ncreasng shareholder value added and assumng constant market value, wll ncrease shareholder returns. We can also dentfy the changes of shareholder value added from market value of equty. Objectve The deal objectve of the present research s to recognze new crtera to assess the performance of managers and companes and make them n lne wth the managers' benefts and the owners' through connectng the benefts and ther rewards wth stockholders' wealth. In fact our man objectve s the study of effects and descrptve capablty of the shareholder value added on each of the crtera of the rsk adjusted return that s the total rsk adjusted return, the systematc rsk adjusted return and the excess return to acheve a crteron to make useful decsons. Fnally the appled objectve of ths research s to help nvestors to determne the approprate nvestment strategy. Ths research wll help them n choosng a type of stock whch has a better return, a rsk adjusted return, and avod nvestors to make mstakes n choosng the stocks and the credtors and lenders can devse valdty for the decsons. On the other hand, by decson makngs of nvestors based on rsk and return, the captals wll be led towards some ndustres whch have a rsk adjusted return and ths wll prepare grounds for optmzed appropraton of the resources and the results of ths research wll be helpful. 1165

3 RESEARCH METHODOLOGY The present research s post ncdental and t has a descrptve nature. Also due to the fact that t s possble to dscover the relatonshp between the two varables through correlaton method and therefore, our research method s correlaton by usng the ntegratve regresson model (panel data). Fnally the present research s appled regardng the objectve. The statstcal method used n the present research s the regresson method by usng ntegratve data and we have used the estmated generalzed least squares (egls) for estmatng of regresson models wth panel data. Also the hypotheses were tested through the results of the econometrcs models and multple regresson by usng evews 7 software. The statstcal socety of the present research entals all companes accepted n tehran stock exchange durng the tme perod between 2007 and 2011 whch have had the followng condtons: Due to the necessty of the exstence of the coverage of the data for the research perod, the name of companes should have been enlsted n the lst of frms accepted n tehran stock exchange before To prepare reports n the same date and delete seasonal effects, ther fscal year should end on end of year. Due to the specal type of actvtes of nvestng companes, banks, nsurances and fnancal ntermedares, the companes for the present project should not be among them. The companes ncluded should not have accumulated loss before the year The data needed to carry out the present research should be presented completely for the perod between 2007 and The samplng method was systematc deleton and we could not have random samplng and the companes were selected consderng the condtons defned for them. By applyng the condtons above, the number of our selected sample was 200 companes. Hypothess H1: there s a relatonshp between shareholder value added and the total rsk adjusted return (rvar). H2: there s a relatonshp between shareholder value added and the systematc rsk adjusted return (rvol). H3: there s a relatonshp between shareholder value added and the excess return (α). Varables In the present research dfferent crtera related to the rsk adjusted return (rvar, rvol, α) have been used as the dependent varable. The extera return s the rate of return created wthout any rsks by an nvestment whch has been ncurred by the nvestor and make the return of dfferent stocks comparable n the market and we have used 3 crtera of the rsk adjusted return, the reward to varablty rato (rvar) to calculate the total rsk adjusted return, the rewards to volatlty rato (rvol) to calculate the systematc rsk adjusted return, and the crteron of dfferental excess return or alpha (α). The calculaton method for them s as follows (jones, 2012): R Rf RVAR ( R ) R RVOL R a R E ( R ) t t t R = real return of stocks Rf = rate of nterest wthout rsk O (r) = devaton or total rsk Β = beta E (rt) = the expected return rate Rm = market return f In ths study, shareholder value added (sva) s used as the ndependent varable. Sva s one of the crtera of value based management. In fact, the shareholder value added s the dfference between frm s value and value of ts labltes and s expressed as follows (gurca, 2007): Sva= present value of operatng cash flows durng the perod+ remnder value+ marketable securtesdebt 1166

4 Present value of operatng cash flows durng the perod= t s cash flows from operatng actvtes durng the perod that s extracted from cash flow statement and dscounted wth approprate rate. emnder value= t s e ual to cash flow that t can be pad to shareholders as dvdend or redeemed of stocks. Marketable securtes= t s equal to short-term nvestments on the balance sheet. Debt= t s the value of total debt n the balance sheet. Fndngs H1: there s a relatonshp between shareholder value added and the total rsk adjusted return (rvar). Table 1. a model by usng estmator elgs Dependent varable: rvar Regresson model: rvar t = β 0 + β 1sva t + ε t Hypothess Independent varable Coeffcents T statstcs P-value F statstcs Durbn-watson Adjusted r2 1 Sva As you can see, the f-statstc n α error level of 0.05 s hgher than the f-statstc n table. So we can say that the regresson model was sgnfcant and durbn watson statstcs s approprate, due to ts tendency of t to 2 and after the removng of frst order autocorrelaton. Also p-value obtaned from the results of model and the coeffcent of the ndependent varable ndcated that the coeffcent of shareholder value added s negatve and sgnfcant. Fnally adjusted coeffcent of determnaton of model ndcated that the model estmated varables have a good explanatory power (48 percent) for explanng of the dependent varable; therefore, the frst hypothess s accepted. But snce ths relatonshp s ndrect and nverse therefore s not recommended to nvestors, credtors and other stakeholders use shareholder value added as an alternatve of total rsk adjusted return for evaluatng of management performance, crtera for success or valuaton of frm s stocks. H2: there s a relatonshp between shareholder value added and the systematc rsk adjusted return (rvol). Table 2. a model by usng estmator elgs Dependent varable: rvol Regresson model: rvol t = β 0 + β 1sva t + ε t Hypothess Independent varable Coeffcents T statstcs P- value F statstcs Durbnwatson Adjusted r 2 2 Sva As you can see, the f-statstc n α error level of 0.05 s hgher than the f-statstc n table. So we can say that the regresson model was sgnfcant and durbn watson statstcs s approprate, due to ts tendency of t to 2 and after the removng of frst order autocorrelaton. Also p-value obtaned from the results of model and the coeffcent of the ndependent varable ndcated that the coeffcent of shareholder value added s negatve and sgnfcant. Although the second hypothess s accepted, but adjusted coeffcent of determnaton of model ndcated that the model estmated varables have a not so good explanatory power (20 percent) for explanng of the dependent varable; therefore, the frst hypothess s accepted. But snce ths relatonshp s ndrect and nverse therefore s not recommended to nvestors, credtors and other stakeholders use shareholder value added as an alternatve of systematc rsk adjusted return for evaluatng of management performance, crtera for success or valuaton of frm s stocks. H3: there s a relatonshp between shareholder value added and the excess return (α). Table 3. a model by usng estmator elgs Dependent varable: α egresson model: α t = β 0 + β 1reva t + ε t Hypothess Independent varable Coeffcents T statstcs P-value F statstcs Durbn-watson Adjusted r 2 3 Sva As you can see, the f-statstc at α error level of 0.05 s hgher than the f-statstc n table. So we can say that the regresson model was sgnfcant and durbn watson statstcs s approprate, due to ts tendency of t to 2 and after the removng of frst order autocorrelaton. Also p-value obtaned from the results of model and the coeffcent of the ndependent varable ndcated that the coeffcent of shareholder value added s negatve and sgnfcant. 1167

5 Fnally adjusted coeffcent of determnaton of model ndcated that the model estmated varables have a good explanatory power (53 percent) for explanng of the dependent varable; but accordng to the obtaned p-value, t could be argued that the relatonshp between shareholder value and excess return s not acceptable. Thus, the thrd hypothess s not accepted. Therefore s not recommended to nvestors, credtors and other stakeholders use shareholder value added as an alternatve of excess return for evaluatng of management performance, crtera for success or valuaton of frm s stocks. Suggestons Due to the crtcsms and based on the tradtonal performance assessment crtera done by the researchers n fnancal areas durng the recent years and the necessty of utlzng and consderng novel crtera t should be consdered that these crtera are a hgh and effectve step towards makng approprate decsons n fnancng, operatons and nvestment. Scope for further research The subject dscussed here can be nvestgated for the dfferent ndustres. The comparson of the nformaton content of market value added (mva) and cash value added (cva) wth the rsk adjusted return. Studyng the relatonshp between shareholder value added and market value added (mva) and cash value added (cav) Studyng the relatonshp between shareholder value added wth eps and dps. REFERENCES Gurca l "new approaches on shareholders' value of a frm," thess, unversty of craova, craova. Goyandeh k "compare the nformaton content of eva and reva wth stock returns lsted companes n tehran stock exchange," thess, unversty of shraz, shraz. Hovezakova ba "the project of the economc value added mplementaton nto the management of the company xy s.r.o n order to rase ts Economc performance," tomas bata unversty, zln. Jahankhan a, zarffard a The management and shareholders of a crteron used to measure the value of the company?. Journal of fnancal. 7: Jones cp Investments: analyss and management. Wley, sant cloud. Kavyan m, samad m Revew on applcaton of the concept of shareholder value added (sva) n fnancal decsons. The frst natonal conference on modern management scence. Lohman c, fortun l, wouters m Desgnng a performance measurement system. Eropean journal of operatonal research. 3: 32. Monks r The need for shareholder actvsm value added and legtmacy. Wlshre assocates. A consultant to thepublc employees retrement system of the state of calforna ( calpers ). Nkomaram h, asgar mr A model for determnng the expected return on the tehran stock exchange ndexes ep, eps, reva, eva. Journal of economc. 20: Rahnamay-roodeposht f, nkoomaram h, shahverdan s Strategc fnancal management (value creaton) based on rsk management. Hakmbash. Tehran. Young sd, byrne sf Eva and value-based management: a pratcal gude to mplementaton. Mcgraw-hll. New york. 1168