Applied Finandal EconomicsApplied Financial Econom 2.docx
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Applied Finandal EconomicsApplied Financial Econom 2.docx
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AppliedFinandalEconomicsAppliedFinancialEconom2
AppliedFinandalEconomicsAppliedFinancialEconomics,2006,16,1199-1216
DoesEVAbeatearningsandcashflowinjapan?
ChikashiTsuji
FacultyofBusinessAdministration,RitsumeikanUniversity,
Kusatsu-city,Shiga525-8577,Japan
E-mail.-maiLPrime_up@minos.acn.ne.JP
TheobjectiveofthispaperistoevaluatetheettectivenessofEconomicValueAdded(EVA),ametricthatisincreasinglyusedinJapanasameasureofcorporatevalue.EVAiscomparedwithseveralothervaluationmeasuresincludingcashflow,operatingincome,andprofitaftertaxfrom
theviewpointofbothlevelsandchanges.AlsotwodifferentformsofEVAareexaminedbyusingtheWeightedCostofCapital(WACC)fromtheCapitalAssetPricingModel(CAPM)andtheWACCfromtheFama-French(1993)model.TheresultsrevealthatcorporatemarketvaluesinbothlevelsandchangeshavestrongerlinkageswithcashflowandotherearningsmeasuresthaneitherformofEVA.
1.Introduction
Corporatevaluationisofobviousimportanceinfinanceresearch.IntheUSA,theimportanceof
shareholdervaluecreationincorporatemanagementhasbeenrecognizedmuchearlierthaninJapan.Asaresult,thisearlyawarenessmayleadintheUSAtoastrongereconomyandabetterbusinessenvironment.ThebackgroundofthisclearerfocusonthemaximizationofcorporatevalueasacentralgoalofmanagementinUSAis(i)activationofbuyingandsellingofmanagementrightssuchasbyM&A,(ii)popularizationofstocksforindividualinvestors,and(iii)bankruptcyinpensionplans.ConsideringthecurrentsituationinJapan,andincontrasttoprogressintheUSA,inrecentyears(i)corporateintegrationsorreorganizationsby,forexample,M&A,haverapidlyincreased,(ii)corporatevalueisbeingpaidmoreattentionbyindividualinvestorsbecauseoftheincreaseofindividualstockholdingsthroughmutualfundsorpensionfunds,andthespreadofonlinetrading,and(iii)requirementsforcorporationstoenhancecorporatevalueshavebecomestrongerduetotheincreasingdifficultyandopaquenessofpublicpensionplanmanagement.Insum,JapancurrentlyappearstobefollowingthepastexperiencesofotherdevelopedeconomiesandJapanesecorporationsshouldseriouslyattemptto
enhancetheirvalues.ItisthenimportanttoevaluatetherelationshipsbetweencorporatevaluesandEconomicValueAdded(EVA)andrelatedvaluationmeasuresinJapan.Inaddition,sinceEVAisameasureoriginallydevelopedintheUSA,anyJapaneseresultsshouldprovideausefulpointofcomparisonfromaneconomythathasdifferentbusinessconventionsandsystemsfromthosefoundintheUSA.Inaddition,andaspointedoutbyCopelandetal.(2000),thecreationofshareholdervalueleadsnotonlytothemoreeffectivemanagementofthosecorporations,butalsotoincreasesinlabourproduc-tivity,jobopportunities,andrealpercapitaGDP.’WhileEVAhasbeengivenanincreasingamountofattentionbyJapanesemanagementexecutives,itisnonethelesssubjecttoanumberofprosandcons(BrealeyandMyers(2000)andDamodaran(2001)).
1Astotheconcretenumericalexamples,seeCopelandetal.(1995).
AppliedFinancialEconomicsISSN0960-3L07print/ISSN14664305online⑥2006Taylor&Francis
http:
//www.tandf.co.uk/journals
DOI:
10.1080/09603100500447537
2页
Originallydevelopedfromtheresidualincomemodel,andintroducedbyStewart(1991),manyofthefindingssupportingtheuseofEVAarefromin-houseresearchsuchasStewart(1994)andO'Byrne{1996}.Inmanycases,somewhatexaggeratedargumentssupportingtheuseofEVAhavebeenpresented`ForgetEPS,ROEandROI.EVAiswhatdrivesstockprices'(SternStewartadvertisementinHarvardBusinessReview,November-December,1995,p.20),or`EVAisalmost50%betterthanitsclosestaccounting-basedcompetitorinexplainingchangesinshareholderwealth'(Stewart,1994,p.75).2IntheUSA,therehasbeenlittleempiricalresearchfocusingonEVAandcorporatevalues,andwhatliteraturethereishasoftenreachedconflictingconclusions:
forexample,O'Byrne(1996)supportedtheusefulnessofEVA,whereasBiddleetal.(1997)providedevidencetothecontrary.3However,totheauthors'bestknowledge,norigorousempiricalresearchfocusingonEVAandcorporatevaluesinJapanhasbeenconducted.
Inaddition,intheAppliedEconomicsjournals,therearemanystudiesoncorporatevalues,suchasKeaseyandShort(1997},Firth(1998),NaceurandGoaied(2002),Brioetal.(2003)BecchettiandAdriani(2004),NaceurandGoaied(2004),JonesandDanbolt(2004),Alonsoetal.(2005),andAbhyankaretal.(2005).4However,noneofthesestudiesfocusonEVA.Accordingly,someattemptshouldbemadetotesttheassertionsofSternStewartpresentresearchwillprovidethisjournalserieswithnewinsights,sincenoAppliedEconomicsjournalpapershaveanalysedEVA.Thepurposeofthispaperis,therefore,toevaluatetheeffectivenessofEVAasavaluationmeasureinJapanbycomparingEVAwithseveralothercommonvaluationmeasuressuchascashflowandoperatingincomes.ThisisaccomplishedbyusingO'Byrne's(1995)model,asusedinthein-houseresearch,asabase.HencethisstudyisthefirsttoobjectivelytestEVAinJapan.ToimplementthecarefulexaminationonEVA,twokindsofEVAaretestedthatemploytheWeightedAverageCostofCapital(WACC)asestimatedbytheCapitalAssetPricingModel(CAPM)andtheWACCasestimatedbytheFama-French(1993)three-factormodel.5
Thesignificantcharacteristicsofthispaperareasfollows:
first,thatEVAisrevealedaslimitedincapturingcorporatemarketvaluesbothinlevelsandchanges.ItisespeciallyfoundthatEVAcannotcapturethedynamicsofcorporatevaluesinJapaneffectively.Second,itisrevealedthattheoft-repeatedassertionthatEVAisthebestmeasureofvaluationisexaggerated,andthatadditionalfactorsinO'Byrne's(1995)modelmaydistortthetrueone-to-onerelationshipbetweenvaluationmeasuresandcorpo-ratevalues.Third,severalreasonsarepointedoutassociatedwiththelimitationsofEVAasavaluationmeasure.Thisshouldbeusefulfordevelopingnewmoreadvancedvaluationmeasuresinthefuture.Fourth,itisshownthepracticaldifficultyofusingaWACCasabenchmarkofvaluationmodels.TwoformsofEVAaretestedthatemploytheWACCfromCAPMandtheFama-French(1993)model,howeverthatusingtheFama-Frenchmodelisclearlysuperior.Finally,itisrevealedtheusefulnessofcapturingcorporatevalueslevelsandchangesinJapanusingcashflowasaby-productofthetestsusedinthispaper.
Theremainderofthepaperisorganizedasfollows.SectionIIprovidesthetheoreticaldiscussionandpresentsthemodelstobetested,SectionIIIexplainsthevariabledefinitionsandmethodology,SectionIVreportstheempiricalresults,andSectionVconcludes.
2Similarrecommendationsare`Abandonearningspershare'{Stewart,1991,p.2),`EVAstandswelloutfromthecrowdasthesinglebestmeasureofwealthcreationonacontemporaneousbasis'(Stewart,1991,p.2),`Earnings,earningspershare,andearningsgrowtharemisleadingmeasuresofcorporateperformance'(Stewart,1991,p.66),and`Thebestpracticalperiodperformancemeasureiseconomicvalueadded{EVA)'(Stewart,1991,p.66).jOtherrelatedEVAstudiesareBiddleetal.(1999),Bernstein(i997,1998),Kleiman(1999),LehnandMakhija{1996),YookandMcCabe(2001),Bacidoreetal.(1997),Inneretal.(1997},Bankeretal.(2000),Wallace(1997),andZimmerman(1997).However,theirfocusisnotontherelationshipbetweenEVAandcorporatemarketvalue.4KeaseyandShort(1997)examinedtherelationshipbetweentheamountofequityretentionbytheoriginalownersandfirmvalueatflotationinUKIPOs.Firth(1998)investigatedtherelationshipsbetweenprofitforecastspublishedintheprospectusesofIPOsandfirmvalueafterIPOsinSingapore.NaceurandGoaied(2002)investigatedthevaluecreationdeterminantsintheTunisiastockexchange.Brioetal.{2003)studiedtherelationshipbetweenthevolumeofinvestmentandfirmvalueinSpain.BecchettiandAdriani(2004)builtamodeltoexaminewhetherhigh-techstockpricesreverttotheirfundamentalvalue.NaceurandGoaied(2004)investigatedthevalue-relevanceofthemayorcorporatefinancialvariables,suchasearningsandbookvalueforTunisianlistedcompaniesbasedontheapproachofOhlson(1995)andRees(1997).JonesandDanbolt(2004)studiedtheimpactofJointVentureannouncementsonthemarketvalueofUKlistedcompanies.Alonsoetal.(2005)analysedtheinfluenceoffinancialleveragedecisions,dividendpayoutpoliciesandtheownershipstructureonthefirmmarketvaluewhencompanieseitherface,ordonotface,profitablegrowthopportunitiesinSpain.Abhvankaretal.f2005}researchedthelong-run,post-mergerstockperformanceofUKacquiringfirms.5Severalstudies,suchasEhrhardt(1994),supporttheefficacyofusingthefactormodelinWACCestimation.
3页
11.TheoryandModei
ThedefinitionofEVAFirst,EVAisdefinedasthefocusoftheinvestigationanddiscussion.EVA,asintroducedbySternStewart&Co.,evaluatescorporatemanagementperformanceonthebasisofwhetheradjustedNOPAT{NetOperatingProfitAfterTax)exceedsthecostofcapital.ThemathematicaldefinitionofEVAisasfollows.
where
operatingprofitaftertaxesseveralaccountingmodifications,
CAPITALAfterAdjI,t-1’investmentcapitalafterseveralaccountingmodifica-tions,andWACCi:
weightedaveragecostofcapital.ThisisthestructuraldefinitionofEVA;inordertotheoreticallyshowhowthismodelisunderstoodinthefieldoffinance,EVAisdiscussedbyrelatingittotwostandardfnanc
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