Economic Value Added (EVA) Disclosure Practices of Sri Lankan Listed Companies

Abstract

Abstract:Transparency, disclosures and information sharing with stakeholders, command a considerable degree of value to the accompanying financial statements of any corporate or business enterprise. Investors and stakeholders are increasingly looking at the performance of companies which they have invested their hard earned funds. To meet such expectations, good governed companies do adopt practices which add to enhance the value of financial statements and value to its readers. The ideas of free cash flow and the evaluation of business on a cash basis developed by Modiglaini and Miller (1961) were extended into the concept of the Economic Value Added (EVA) (Stewart and Stern 1971). The traditional financial performance measures have not presented the real shareholder value of an enterprise. Thus, the EVA is one of main evaluation criteria of companies' commitment with shareholder value maximization. In this context, this research investigated the EVA disclosures in the annual reports of Sri Lankan listed companies. Analyzing annual reports of Sri Lankan largest 85 listed companies over a period of 5 years from 2009 to 2013, the results indicated that 15 numbers of listed companies, as a percentage of 17.65 of the sample disclosed the EVA statement in their annual reports. The study further explored the industry composition, residential status, medium of disclosure, areas of EVA application and extent of EVA related computation prepared and disclosed by EVA reporting companies. Univariate analysis was used to identify the extent of EVA disclosures of listed companies in Sri Lanka and it was found that, existence of significant inconsistencies and irregularities in measurement of EVA and its major components of EVA reporting listed companies. The second part of the study explored that the corporate attributes such as back ground information and financial performance indicators of companies are influenced to the choice of EVA disclosure. Therefore, research performed a comparison of differences between EVA reporting and EVA non reporting listed companies on the basis of their background indicators and financial performance measures. Research employed the two independent sample t-tests to identify the factors influencing to EVA usage and disclosure choice of Sri Lankan listed companies in terms of company size, profitability, leverage etc. Research finds that the EVA usage and EVA disclosure choice of Sri Lankan companies are influenced by the company size, leverage and earnings potential. Further, the study recommends the importance of implementing EVA disclosures as a mandatory requirement for Sri Lankan listed companies.

Economic Profit as Indicator of Food Retailing Enterprises' Performance

“…The best-known method of estimating economic profit is the Economic Value-Added indicator (EVA™), developed by the consulting company Stern & Stuart (Stern et al, 2001). The economic essence of EVA is that the enterprise should not only ensure break-even operation, including the return on investment, but also generate value added (the school of classics calls it the additional cost) (Thilakerathne, 2015).…”

Does EVA valuation model outperform earnings valuation model in explaining market value of equity?

“…Therefore, the study recommended Indian companies to implement EVA as a periodic performance measure. Thilakerathne (2015) further clarified that EVA usage and EVA disclosure choice of Sri Lankan companies depends upon company size, profitability, leverage and so forth. However, his study recommended that all listed Sri Lankan companies should have EVA disclosures.…”

“…Khan, Chouhan, Chandra, and Goswami (2012) elucidated that the information content of EVA is better than that of earnings in explaining stock returns of the Karachi Stock Exchange. Thilakerathne (2015) explained that it cannot be denied that transparency, disclosure, and sharing of information with stakeholders command a considerable degree of value to the accompanying financial statements of any corporate or business enterprises. However, stakeholders are more looking at the performance of the companies where they have invested their hard-earned money.…”

A Study of Economic Value Added Disclosures in the Annual Reports: Is EVA a Superior Measure of Corporate Performance?

“…Companies with greater return on assets produce greater economic value added." According to Thilakerathne (2015), "Transparency, disclosures and information sharing with stakeholders, command a considerable degree of value to the accompanying financial statements of any corporate or business enterprise. Investors and stakeholders are increasingly looking at the performance of companies which they have invested their hard earned funds.…”