Study of measurement of wealth creation by car manufacturers through economic value added concept between 2001 to 2005

Abstract

Today maximizing shareholders’ wealth has become the new corporate paradigm. Shareholders’ wealth is measured by the returns they receive on their investments. Returns are in two parts, from dividends and capital appreciation reflected in the market value of shares, of which market value is the dominant part. Wealth maximization means creation of maximum value for company’s shareholders which mean maximizing the market price of the shares. Shareholders’ wealth is result of companies’ performance management. In order to measure the performance companies’ management, several tools have been used. Some tools are traditional profit based measures and some of them are new trendier value based performance measures. Among new performance measures, Economic Value Added (EVA) has received attention and recognition in accounting and financial literature as a vital tool to measure corporate performance. EVA is a measure of corporate performance that differs from others by including charged profits against cost of all the capital employed. EVA against other measure tools emphasis that if a firm wants to create wealth for its owners, it must earn more on its total invested capital than the cost of the capital. Operationally defined, EVA is the difference between Net Operation Profits after Taxes (NOPAT) and capital charge. PURPOSE OF THE STUDY: The basic theme of the study is woven around the relationship between Shareholders’ Wealth and Economic Value added (EVA) in Indian Car Manufacturers Companies, listed in Bombay Stock Exchange (BSE). The first reason for undertaking this study is assessment of Indian Car Manufacturer Companies ability to create shareholders’ wealth. The researcher is of the opinion that positive or negative EVA affects earning per share, the market share price, the market value of company and thereby the shareholders’ wealth. Therefore EVA is a measurement tool for measuring the shareholders’ wealth. Finding out the relationship between created shareholders’ value and EVA is the second main reason for selection of this study. Considering the relationship between Shareholders’ Wealth and other operation company’s measures tools, in order to find out the best tool to measure the performance management is the third reason for undertaking this study.