THE BEST RELATIVE AND INCREMENTAL INFORMATION CONTENTS OF ECONOMIC VALUE ADDED (EVA)

Transcription

1 THE BEST RELATIVE AND INCREMENTAL INFORMATION CONTENTS OF ECONOMIC VALUE ADDED () HASSAN MOHAMMADI*, HASSAN HEIDARY SOLTAN ABADI**, HAMED MOKHTARI*** *Islamic Azad Universiy, Persian GULF Inernaional Educaional Branch, Khuzesan, MA in accouning, Member of he faculy of Islamic Azad Universiy- Zarghan **Islamic Azad Universiy, Persian GULF Inernaional Educaional Branch, Khuzesan, Accouning Senior ***Islamic Azad Universiy, Persian GULF Inernaional Educaional Branch, Khuzesan, Accouning Senior ABSTRACT Pinnacle Research Journals 17 In he presen sudy, he main purpose is examinaion of relaive and incremenal informaion conens of and for predicion of incomes. For ha purpose, he relaion beween he operaing income of he nex period and variaions in he daa on,, operaing income and operaion cash flows for he companies lised in Tehran Socks Exchange from 21 hrough 211 were esed. The resuls of esing he hypoheses show ha sill he operaing income as he mos imporan accouning variable in financial and invesmen decisions are paid aenion by decision makers in he socks exchange and in mos cases i has more conen informaion han oher variables. According o he findings of his sudy,, and could no show a significan relaion wih he operaing income or incremenal informaion conen. KEYWORDS:,, operaing income, operaion cash flows, incremenal informaion conen INTRODUCTION One of he imporan poins frequenly being esed and examined in accouning sudies is he issue of informaion conen of accouning iems concerning predicion of some facors, including dividends. The purpose of he informaion conen of an accouning crierion is he degree of is use and is usefulness in he process of decision making by decision makers of he invesmen marke. The informaion conen es is conduced in wo forms: relaive informaion conen and incremenal informaion conen. The opic of relaive informaion conen is in order when he invesigaor seeks o know from among wo or more accouning crieria, which

2 has more informaion conen as compared wih oher variables. In oher words, when he purpose is ranking accouning crieria (especially when hese crieria are no addiive in decision models), we are concerned wih he relaive informaion conen of hese crieria. On he oher hand, in sudies concerning he incremenal informaion conen of accouning iems, he main purpose is responding o he quesion wheher one or more accouning crieria add somehing beyond oher variables o i. Among hese subjecs one can menion he analysis of he incremenal informaion conen of cash relaive o he income or he incremenal informaion conen of disclosure of complemenary informaion of basic financial saemens. One of he above-menioned accouning crieria ha is frequenly used for he subjec is he value-added and is emergence races back o he ime when he commiee of accouning and audiing crieria of he US Associaion of Accounans (1999), as well as some inernaional accouning sudies suggesed ha he value-added saemen, along wih oher financial saemens, should be prepared and disclosed. In he presen sudy, we have ried o es and analyze he incremenal informaion conen of he economic value-added and he refined value-added versus he accouning profi and he cash flows of performance. THEORETICAL BASES AND LITERATURE One of he major criiques one is he fac ha i compues he opporuniy cos of resources used in he Co. based on heir book values, while he invesors excep a reurn based on he marke value. I he invesors sell he Co. a is marke value and inves he proceeds on asses wih a risk equal o ha of he Co. / hey can expec earning a reurn equivalen o he invesmen equiy based on he oal marke value of he Co. and no merely he book value of he invesmen as shown in he balance shee. As a resul, he invesmen equiy mus ineviably reflec he acual opporuniy cos of invesors (Richer Honold, 2). For he purpose of correcing his defec, M. Bacidore Jeffery e al. (1997), suggesed is replacemen by a measuring crierion ha hey called. consiss of he residual no found by deducing he opporuniy cos of invesors a he marke value from he ne operaing income afer ax, which is compued as follows: Pinnacle Research Journals 18 = NOPAT WACC (MCAPITAL -1 ), Where: NOPAT = no afer ax operaing income in period WACC = weighed average of he invesmen equiy MCAPITAL -1 = he company s marke value a he beginning of period MCAPITAC can be found by one of he wo mehods: MV = MVA + I BV = presen value of he fuure S + he capial used MV = MCAPITAL = (he number of socks of he Co. he sock exchange price a he beginning of he period ) + he marke value of oal liabiliies - Curren liabiliies, excluding ineres

3 Advocaes of, for adjusing he accouning balance shee, ake care of he value of asses used in he Co. before carrying ou esimaions. These adjusmens mainly include adding he cumulaive depreciaed goodwill he capial value of performance, leases, R&D and coss of markeing and developmen of new producs and oher equivalens of capial o he oal asses, he purpose is represenaion of an adjused balance shee ha reflecs being used much more carefully han he inrinsically conservaive balance shee based on he hisorical cos according o he acceped accouning principles. Therefore, anoher criique o is ha he adjusmens made in he book value of he exising asses in he accouning balance shee do no deermine ye he oal value of he Co. ha includes he value of he fuure opporuniies as well. The oal value of he Co. consiss of he oal asses being used as well as he ne presen value of he curren and fuure invesmen opporuniies, which is also equal o he marke value of he righs of sockholders and he marke value of liabiliies. Therefore, he discrepancy beween he marke value of he Co. and he economic book value of is asses being used represen he marke s evaluaion of he value of he curren and fuure opporuniies for invesmen of he Co. This difference could be regarded as an evaluaion of he company s compeiive sraegy and allocaion of is resources. Pinnacle Research Journals 19 Crieria for measuring wealh generaion for sockholders ha focus on he company s sock price, seek deerminaions of he level of increase in he sockholder s wealh from one period o anoher based on he dividends hey receive and increase in he company s sock value. These crieria basically deermine ha if he invesor purchases his socks a he beginning of he period and sells i a he end of he period, how he has aced in he process. This ype of wealh-generaion measuremen crieria for sockholders are called "measuring crieria based on he business Performance of he company". is one of such crieria. In conras, measuring crieria (such as Eva) ha focus on he operaional performance of he company as viewed by he invesors, are called measuring crieria based on he operaional performance. A measuring crierion based on Operaional performance focuses solely on he company s performance in a given period, while a measuring crierion based on he business performance, considers revisions in he marke opinions abou he oal performance based on he fuure operaions of he Co. if he sock markes ae efficien and we consider a long-erm ime horizon, hese wo ypes of measuring crieria converge a a ime poin. However, since usually he performance is evaluaed in a shorer ime horizon (for example, one, six monhs, hree monhs or one monh), herefore, he shorer he ime horizon, he more divergen he resuls of measuring crieria based on operaional performance and business performance. Anoher poin is he fac ha, heoreically, irrespecive of wheher NOPAT and WACC or he ne (adjused) profi and he sockholders equiy are used in compuing, he resul should be he same. Despie of his, when he marke value of a Co. differs from is book value, such an equaliy does no hold. The requiremen for equaliy of he wo cases is ha D M =D and E M =E. In oher words, he marke values of sockholders liabiliies and righs mus be he same as heir book values mainly due o he fac ha he marke value of he Co. includes an esimaion of he values of heir sraegies and fuure opporuniies; herefore, he marke value of he sockholders righs differs from heir economic book value. This concepual issue is no he case for due o is dependence on he marke value of he capial.

4 Therefore, he advocaes of sae wo advanages of he same as compared wih : Firs, whenever is posiive, hen an exra value as compared wih he opporuniy cos based on he marke is creaed for he sockholders. The curren operaing income for invesors a he end of period exceeds he acual opporuniy cos of heir invesmen, while his is no he case for. I is possible ha he sockholders gain a reurn less han he acual opporuniy cos of he invesmen bu he of he company is posiive, as i were. Second, could be compued based on he oal profi flows for he righs of sockholders (he sockholder liabiliies and righs) or only based on profi flows for he sockholder righs. This feaure applies only o for which he marke value of he liabiliies and righs of sockholders equals heir economic (bu no accouning) book value. HYPOTHESES OF THE STUDY: 1. The refined economic value-added bears incremenal economic informaion conen relaive o he cash flows of operaions. 2. The refined economic value-added bears incremenal economic informaion conen relaive o he operaing income of he curren period. 3. The economic value-added bears incremenal economic informaion conen relaive o he operaional cash flows. 4. The economic value-added bears incremenal economic informaion conen relaive o he operaing income of he curren period. 5. The cash flows of he operaions bears incremenal informaion conen relaive o he operaing income of he curren period. RESEARCH METHODOLOGY Pinnacle Research Journals 2 This sudy is of quasi-empirical ype in he field of posiive accouning research. In his sudy, financial informaion is obained by reference o he library and deparmen of monioring and examinaion of Tehran Socks Exchange, obaining financial saemens and accompanying noes relaed o he companies under sudy. The daa in quesion have been colleced using Tadbir Pardaz Sofware. The ime period of he sudy was from early 1996 hrough he end of he financial 26. The populaion of he sudy consiss of all manufacuring companies acceped in Tehran Socks Exchange (hrough any source) whose socks were being exchanged here since 1996 and heir financial ends a March 2, each. Of he 152 companies ha me he above condiions, 96 companies were discarded from he sudy due o heir financial informaion or heir sock price daa no being available or ransacions on heir socks being emporarily or permanenly sopped in he period under sudy (excep for he sops due o holding he exraordinary general assemblies of he companies) and a las, 56 companies were seleced as companies under sudy. As you see, he auhors have no aemped sampling due o he size of he populaion being limied. VARIABLES UNDER STUDY

5 The dependen variable in his sudy is he operaing income of he nex period. Independen variables are: he operaing income (he before-ax income exraced from he profi and loss saemen), operaions cash flows (exraced form he cash flows saemen), he economic value-added (compued by he financial managemen mehod). In his sudy, he financial informaion are obained by reference o he library, Deparmen of Monioring and Examinaion of Tehran Socks Exchange as well as he Audiing organizaion and obaining financial saemens and heir accompanying noes relaing o he companies under sudy. The mehod of esing he hypoheses To es he hypoheses of his sudy, one can use models ha somehow relae variaions in independen variables o he operaing income of he company. For ha purpose, economeric models are used; for esing he relevan hypoheses, correlaion analysis by mulivariae regression mehod for he daa in cross secional form for any of he s under sudy and also in cumulaive form, are used. The general model used in his sudy ha is he general model of income evaluaion, is k i( 1) i[ A i( 1) / A i( 1) ] i1 e i Pinnacle Research Journals 21 is he operaing income of company I in he period +1, A, 1 In which, ( 1) is he operaing income of company I a he beginning of he period +1 and A i is he variaion in he reurn of he operaing income of he company I in he period +1 (he difference beween he beginning and he end of he period). Of course, he operaing income of he nex period iself could be subsiued using he operaing income of he curren period, he operaions cash flows, he economic value-added and he refined economic value-added. For esing he hypoheses, he above model is firs fied for an explanaory variable. Then he explanaory variables are added o he model individually. Increase in he adjused R 2 in he second model relaive o ha in he firs model provided ha he hypohesis of general insignificance of he bivariae regression ( H : 1 2 ) in models 5 o 8 is rejeced, suppors he incremenal informaion conen of he second explanaory variable relaive o he firs explanaory variable. Tha is, by incorporaing he second explanaory variable ino he firs model, is explanaory power for he behavior of he dividends in he nex period will be increased. I is noeworhy ha he F-saisic (derivable from ANOVA display) is used o es he general significance of he mulivariae regression (he hypohesis of β i s being he same). Display (1) shows he models being used o es he sudy hypoheses. i ( 1) TABLE 1: MODELS BEING USED TO TEST THE STUDY HYPOTHESES Model 1 i [ ( 1) 1 i / i ] ei

6 2 i [ ( 1) 1 i / i ] ei 3 i [ ( 1) 1 i / i ] ei 4 i [ ( 1) 1 i / i ] ei 5 i 1[ i / i ] 2[ i / i ] 6 i [ ( 1) 1 i / i ] 2[ i / i ] ei 7 i [ ( 1) 1 i / i ] 2[ i / i ] ei 8 i [ ( 1) 1 i / i ] 2[ i / i ] ei In he above relaions, i( 1) denoes he company I s operaing income in he period +1. i denoes is refined economic value-added a he beginning of he period, Δ i is refined economic value-added variaion in he period (he difference beween he beginning and he end of he period), i is economic value-added a he beginning of he period, Δ i variaions in is economic value-added a he beginning of he period and i is operaional income variaion in he period (he difference of he beginning and he end of he period) while denoes he random error elemen. Resuls of esing he hypoheses The resuls of esing he hypoheses are summarized in display (2): Pinnacle Research Journals 22 As you see in display (2), in model (5) is incremened relaive o model (4) in he s 1998, 21 and 24. However, F-saisic is significan only in he 21. Therefore, one can claim ha he refined economic value-added in ha bore an incremenal informaion conen relaive he operaions cash flows and he firs hypohesis is suppored for ha. However, for oher s and for cumulaive daa, ha hypohesis is rejeced. Also, examinaion of display (2) shows ha R 2 in model (6) has no increased wih respec o R 2 in model (3) in any of he s under sudy. Therefore, one can conclude ha in no case he refined economic value-added bears incremenal informaion conen wih respec o he profi. Therefore, hypohesis 2 is rejeced for all s and for cumulaive daa. As regards esing he hird hypohesis, observe ha in model (7), R 2 is incremened relaive o model (4) for he s 1999, 2, 21 and 22, while he saisic is significan only in 21. Therefore, one can conclude ha he economic value-added wi respec o he operaions cash flows bears an incremenal informaion conen only in 21. Therefore, hypohesis 3 is suppored for ha and is rejeced for oher s. Regarding he fourh hypohesis, observe ha R 2 in model (8) is incremened relaive o model (3) for he s 2, 22 and 25, while F-saisic is insignifican only in he 2. In oher words, excep for he s 22 and 25, he

7 economic value-added, by being incorporaed in model (3), has been able o increase explanaion power concerning he behavior of he performance profiabiliy of he nex period. TABLE 2: SUMMARY OF THE RESULTS OF TESTING THE STUDY HYPOTHESES Tesing R F Resul of esing hypohesis 1 rejeced rejeced rejeced suppored rejeced Pooled Tesing R F Resul of esing hypohesis 1 rejeced rejeced rejeced rejeced rejeced Tesing R Pinnacle Research Journals 23 F Resul of esing hypohesis 2 Tesing rejeced rejeced rejeced rejeced rejeced Pooled R F Resul of esing hypohesis rejeced rejeced rejeced rejeced rejeced

8 Tesing R F Resul of esing hypohesis 3 rejeced rejeced rejeced suppored rejeced Pooled Tesing R F Resul of esing hypohesis 3 rejeced rejeced rejeced rejeced rejeced Tesing R F Pinnacle Research Journals 24 Resul of esing hypohesis 4 Tesing rejeced rejeced rejeced rejeced suppored Pooled R F Resul of esing hypohesis 4 rejeced rejeced suppored rejeced rejeced

9 Tesing R F Resul of esing hypohesis 5 rejeced suppored rejeced rejeced rejeced Pooled Tesing R F Resul of esing hypohesis 5 rejeced rejeced suppored rejeced rejeced CONCLUSION Pinnacle Research Journals 25 Examinaion of he resuls of esing he hypoheses shows differences in he condiions governing he communiy: economic, social and poliical in he s under sudy. In fac, he same difference has caused he difference in he resuls of esing he hypoheses among differen s. However, on he whole, i is observed ha sill he accouning profi as he mos imporan accouning variable is paid aenion by decision makers in Tehran Socks Exchange in heir financial and invesmen decisions and in mos cases i bears incremenal informaion conen relaive o oher crieria. Also, according o he findings of his sudy, in he majoriy of cases, i had no significan relaion wih he income of he nex period and had no incremenal informaion conen wih respec o oher variables under sudy. Of course, one should no ignore he fac ha failing o suppor he hypohesis of an efficien marke in Tehran Socks Exchange, according o he sudies conduced o dae, in oher words, inefficiency of ha marke, even in is weak forms, would affec much he inerpreaion of he resuls of his sudy. On he oher hand, raising and esing many issues ha could be made in advanced socks exchanges of he world, could face serious difficulies if made in such a marke. Therefore, one can conclude ha in he Iranian Invesmen Marke, he refined economic valueadded could no be used. Facors such as inefficiency of he invesmen marke and high coss relaive o he reurn could be he reasons. SUGGESTIONS: Considering he resuls of his sudy, he following suggesions are in order:

10 Pracical suggesions 1. We sugges o Tehran Socks Exchange o require for reporing crieria oher han P/E, such as and, o aenuae he role of he invesmen income in invesmen decisions and hereby o provide a conribuion for accouning informaion 2. In view of he fac ha Iranian accouning sandards lack comprehensiveness and do no include all inernaional sandards such as he ransferred ax, accurae compuaion of he end of service indemniy, ec., he accouning findings canno provide accurae informaion. So we sugges o hose developing accouning sandards in Iran o uilize all accouning sandards, so ha he validiy of informaion such as and ha are derived from accouning informaion are upgraded. 3. We sugges ha Tehran Socks Exchange creaes a daabase, so ha he informaion such as, D, weighed average of he invesmen equiy, cash value added and oher informaion are provided o he applicans hrough i so as by using hose crieria, he degree of wealh generaion of he companies, oo, are specified for he sockholders. Limiaions of he sudy 1. Incompleeness of he informaion on financial saemens of he companies acceped in he Socks Exchange in he library and Tehran Socks Exchange Deparmen of Monioring and Supervision 2. Lack of an acceped sandard on developmen of he and saemens and, herefore, he likelihood of difference from similar sudies in compuaion of 3. Lack of informaion on companies ha are no members of Tehran Socks Exchange due o heir being no accessible. REFERENCES Pinnacle Research Journals 26 A. Ross Sephen, W. Weserfield Randolph, Jaffe Jeffery.(22). "Corporae Finance", 6 h Ediion. Arab Mazar Yazdi (1995): he incremenal informaion conen of cash and commied flows, PhD hesis, supervised by Dr. Ali Saghafi, School of Managemen, Tehran Universiy Ausin, L.M. (26). "Benchmarking o Economic Value Added", Benchmarking: An Inernaional, 12(2): Azar, Adel and Momeni, Mansour (1998): saisics and is applicaion in managemen (saisical analysis), second volume, Tehran, SAMT, firs publishing Bacidore, J.M. Boquis, J.A.V. Thakor (1997). "The Search for he Bes Financial Performance Measure", Financial Analyss Journal, 55(3): 1-2.

11 Bao, B-H. and D-H. Bao (1998). "Usefulness of Value Added and Abnormal Economic Earnings: An Empirical Examinaion", Journal of Business Finance and Accouning, 25(1): Bausch Andreas, E. Weibenberger Barbara, Blome Marcus. (23). "Is Marke Value-Based Residual Income a Superior Performance Measure Compared o Book Value-Based Residual Income, Working Paper, 1. BeIkaoui, Ahmed Riahi (1993). Accouning Theory, Third ediion, The Dryden Press, BeIkaoui, Ahmed Riahi (1996). Performance Resuls in value Added Reporing, Quorum Books, Firs publicaion, USA. Cheng, J.M.S. Tsao, S.M. Tsai, W.H. and H.H.J. Tu (27). "Will Channel Addiions Increase The Financial Performance of The Firm The Evidence From Taiwan", Indusrial Markeing Managemen, 36(1): Copeland, T. (22). "Wan o Creae Value", Sraegic Finance, 2(1): Ekadjaja, Agusin. "Economic Value Added How I Become An Effecive Managemen Conrol Tool", Klipping Journal Riser Journal Akunansi. Ferguson, R. Renzler, J. and S. Yu (25). "Does Economic Value Added () Improve Sock Performance Profiabiliy", Journal of Applied Finance, Fall/Winer, 4(2): Ferguson Rober, Leisikow Dean. (1998). "Search for he Bes Financial Performance Measure", Financial Analyss Journal, 54(1): Forghandous Haghighi, Kambiz and Bani Mahd, Bahman (22): he value of he value-added saemen, Tehran, Hessabdar Monhly, 148. Hosseini Azan Akhari, Seyed Mehdi (26): he relaion of and EPS and he price o profi raio. MA hesis, supervised by Dr. Gholamhossein Mahdavi, Shiraz Universiy Pinnacle Research Journals 27 Jeffrey M. Bacidore, John A. Boquis, Todd T. Milbourn, and Anjan V. Thakor. (1997). "The Search for he Bes Financial Performance Measure", Financial Analyss Journal, Jensen Michael, Kevin Murphy. "Performance Pay and Top-Managemen Incenives", Journal of Poliical Economy, 98(2), Makelainen, "Esa. Economic Value Added as a Managemen Tool," available a: Nourvash, Iraj and Mashayekhi, Bia (24): he incremenal informaion conen of he value added and he cash value added versus he accouning profi and he performance cash flows, financial research quarerly, 17:

12 Shahriari, Ali Akbar (22). ((on he informaion conen of he value-added as compared wih he profi and he performance cash flows, hesis)), supervised by Kambiz Forghandous Haghighi, Tehran, Islmic Azad Universiy, Cenral Branch. Sewar G. Benne, Sewar Sern. (24). "Closing he Gap in GAAP: Fix Accouning by Reporing Economic Profi". Pinnacle Research Journals 28