Post on 06-Dec-2021
THE RELATIONSHIP BETWEEN ECONOMIC VALUE ADDED AND STOCK PRICE RETURNS IN THAI ENERGY SECTOR
MISS PENG FANG- FANG
A Thesis Submitted in Partial Fulfillment of the Requirements For the Degree of Master of Business Administration
Department of International Business Graduate School
University of the Thai Chamber of Commerce 2008
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THE RELATIONSHIP BETWEEN ECONOMIC VALUE ADDED AND STOCK PRICE RETURNS IN THAI ENERGY SECTOR
PENG FANG- FANG
A Thesis Submitted in Partial Fulfillment of the Requirements
For the Degree of Master of Business Administration Department of International Business
Graduate School University of the Thai Chamber of Commerce
2008
copy Copyright by University of the Thai Chamber of Commerce
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THESIS APPROVAL GRADUATE SCHOOL
Master of Business Administration
Degree International Business
Major Field
THE RELATIONSHIP BETWEEN ECONOMIC VALUE ADDED AND STOCK PRICE RETURN IN THAI ENERGY SECTOR
Peng Fang-Fang 2008
Name Graduation Year
Accepted by the Graduate School University of the Thai Chamber of Commerce in Partial Fulfillment of the Requirements for the Masterrsquos Degree
Dean Graduate School (Dr Ekachai Apisakkul)
Thesis Committee
Chairperson
(Dr Phusit Wonglorsaichon)
Thesis Advisor (Dr Kittiphun Khongsawatkiat)
helliphellip Thesis Co-Advisor (Dr Thasana Boonkwan)
helliphellip Member
(Dr Pussadee Polsaram)
External Committee
(Assoc Prof Sriaroon Resanond)
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Thesis Title The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Name Peng Fang-Fang Degree Master of Business Administration Major Field International Business Thesis Advisor Dr Kittiphun Khongsawatkiat Thesis Co-Advisor Dr Thasana Boonkwan Graduation Year 2008
ABSTRACT
In the eighties the rapid changes have led to a general dissatisfaction with traditional
performance measures One of the most popular mechanisms is Economic Value Added
(EVA) has been created by a US-based consulting firm called Stern Stewart amp Co The
company claimed that EVA can increase transparency for investors and managers
developed and trademarked Stern Stewart amp Co launched the concept of EVA and it
widespread as the financial management and incentive compensation system EVA has
been literally adopted by thousands of the leading firms all around the world EVA is not
constrained by the Generally Accepted Accounted Principle (or GAAP) so it also has its
critics Some experts suggested that EVA is not the best choice
An emerging literature of analyze whether EVA is highly associated with stock returns
than traditional performance measures has addressed the empirical issue Until now there
are only few EVA relevant studies in Thailand Thus this is an opportunity to
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start a research in this field The purpose of this study is to investigate if EVA can be
suitable for applying to the Thai energy sector which is were mostly affected the
performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can
better affect the operational performance than the traditional performance index
(including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby
stock returns
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has
the most significant relevance and finally one is EVA EVA has relationship with MVA
but can not affect MVA by regression analysis Thus EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index of the Thai energy sector However the researcher suggests that
any managers shareholders and participants can use EVA as an assistant tool with
traditional performance measures instant of replacing anyone
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ACKNOWLEDGEMENTS I would like to express my gratitude to the people who have played especially
important role in the development of this research First of all let me pay my deepest
acknowledgement to my supervisors DrKittiphun Khongsawatkiat and Dr Thassna
Boonkwan for their valuable advice and recommendations The excellent research method
course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my
key thinking partner MrWeera Weerakhajornsak for his professional directions and
generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr
Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its
final shape with their kindness critique
Perhaps the most important is the courage from my parents Mr Peng Han-Qing
and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard
times Of course my appreciation goes to all my friends whose sharing ideas and
comments are woven into the research I wish I could express my sincerely thanks for how
they have enriched my life
Peng Fang-Fang
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TABLE OF CONTENTS
Page ENGLISH ABSTRACT iv
THAI ABSTRACT vi
ACKNOWLEDGEMENTS viii
TABLE OF CONTENTShelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xi
LIST OF ABBREVIATION helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xii
LIST OF TABLES xiv
LIST OF FIGURES helliphelliphellip xv
Chapter 1 Introduction 1
State of the Problems 5 Objectives of the Study 6
Expected Benefits 7 Scope and limitations 7 Operation Definition 7 Organization of the Study 9
2 Literature Review 10 Traditional Performance Measures 11 Value-Based Management (VBM) 13 Market Value Added (MVA) 15
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TABLE OF CONTENTS (COUNTINUED)
Chapter Page From MVA to EVA 16 Economic Value Added (EVA)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 18 The Originsndash Residual Income (RI)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 17 The EVA Metric helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 19 The Elements of EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 21 Accounting Adjustmentshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 24 Advantages and Disadvantageshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 26 Related Research helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 33 Research in support of EVA as the best driver of MVAhelliphelliphelliphelliphelliphellip 33 Criticisms of EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 37
3 Research Methodology 42 Conceptual Frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 43 Research Designhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Population helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Data Collectionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 45
Hypotheseshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 49 Data Analysishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 50
4 Results of Analysis hellip 52 Analyze the innovation measure ndashEVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
Analyze the traditional measures (EPS ROA and ROE) helliphelliphellip 58 The results of all independent variableshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 59
5 Conclusion Discussion and Suggestion 62 Conclusion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 62
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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11
21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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12
incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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23
2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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30
statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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31
(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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35
turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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37
Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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d
CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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60
is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
Ahmad Ismail (2006) Is economic value added more associated with stock return than accounting earnings The UK evidence International Journal of Managerial Finance Vol 2 No 4 pp 343-353
Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Akiston H Hamburg J amp Ittner C (1997) Linking quality to profits Milwaukee WI
SQC Quality Press Armstrong M and Baron A (1998) Performance Management The New Realities
Institute of Personnel and Development London Andrew C Worthington and Tracey West (2001) Economic Value-Addedreg A Review of
the Theoretical and Empirical Literature Asian Review of Accounting 9(1) pp 67-86
Anderson A M Bey R P amp Weaver S C (2005) Economic Value Addedreg
Adjustments Much to Do About Nothing Retrieved January 2008 from httpwwwlehighedu~incbeugAttachmentsAnderson20EVA204-7-05pdf Anthony R (1973) Accounting for the cost of equity Harvard Business Review V5188-
102
Aswath Damodaran (2002) Economic Value Added (EVA) chapter EVA and MVA
Benedikt Wahler (2001) Economic Value Added A comprehensive Financial Management System Seminararbeit zur Erlangung eines Leistungsnachweises
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d
72
im Fach Risiko Management Biddle G C and Bowen R M (1997) Does EVA beat earnings Evidence on
associations with stock returns and firm values Journal of Accounting and Economics 301-336
Brottger R (1999) Economic Value Added The essence to creating real wealth
Unpublished Mumeo Department of Economics University of Stellenbosch Brealy RA and Myers SC (2000) Principles of Corporate Finance Irwin Burr
RidgeIllinois Brigham Eugene FLouis C Gapenski and Michael C Ehrhardt (1999) Financial
Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
China Business Daily News (2008Feb16)
httpwwwbjgzwgovcngzjcmzwz152200803170110htm Clinton BD amp Chen S (1998) Do New Performance Measures Measure
Up Management Accounting 80 4 38ndash44 Creelman J (1998) Building and implementing a Balanced Scorecard International
best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
Efficiency Fluorescent Fixtures by Photopia Program Kasen Bundit Journal vo9 no1Jan-Jun2008
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73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
Creation in an Emerging Market The Case of Saudi ArabiaInternational Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen (Sep1998) Economic Value Added as a management tool Helsiniki
School of Economics and Business Administration Retrieved January 2008 from httpwwwevanomicscomevastudyshtml
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
Theory of Investment The American Economic Review
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serve
d
74
Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
into results Journal of Applied Corporate Finance Fall Vol 13 No 3 pp44ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1994) EVA Fact and Fantasy Journal of Applied Corporate
Finance 7(2) 71-84 GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 George Athanassakos (2007) Value-based management EVA and stock price
performance in Canada Richard Ivey School of Business The University of Western Ontario London Canada Vol 45 No 9
Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
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hts re
serve
d
75
Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
zur Prognose der Peformance europscher Aktien Arbeitsberichte der Hochschule fur Bankwirtschaft Nr 27 Hochschule fur Bankwirtschaft ndash Private Fachhochschule der Bankakademie (ed) Dezember 2000 FrankfurtMain
Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
ลขสท
ธ มหาว
ทยาลย
หอการ
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hts re
serve
d
76
httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1996) Evareg An integrated
financial management system European Financial Management Joel Stern G Bennett Stewart III and Donald H Chew Jr (1998) The EVA Financial
Management System in Chew Donald H jr(ed) The New Corporate Finance Where Theory Meets Practice 2 nd edition Boston 140-154
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
ลขสท
ธ มหาว
ทยาลย
หอการ
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ย
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right
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TCC
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hts re
serve
d
77
Joel Stern (2008) The World of Finance Business Brief JuneJuly 2008 from httpwwwsternstewartcomresearchstudies2aspxID=1636
John A Kay and J A Kay (January 1993) Foundations of Corporate Success How
Business Strategies Add Value Oxford University Press USA John Ballow Henric Persson and Fred Knechtel (2001) EVA and the Chemical Industry
How Do Companies Rank EVA and the Chemical Industry How Do Companies Rank ICIS Chemical Business from httpwwwiciscomArticles20010903146008eva-and-the-chemical-industry-how-do-companies-rankhtml
Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Joseph Chang (July 1997) Spreading EVA Chemical Market Report Kaplan RS amp Norton DP (1996) The Balance Scorecard Translating Strategy into
Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
Keen Peter (1999) Economic Value Added in Keen Peter Every Managerrsquos Guide to
Business Processes internet document accessed 05022001 httpwwwpeterkeencomemgbp007htm
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ธ มหาว
ทยาลย
หอการ
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right
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hts re
serve
d
78
Knight James A (1998) Value based management developing a systematic approach to creating shareholder value New York USA Mc Graw-Hill companies
Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49 Lars Oxelheim and Clas Wihlborg (2001) Recognizing macroeconomic fluctuations in
value based management Journal of Applied Corporate Finance Vol 15 No 4 2003
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
TSMC Journal of Jen-Teh12838 P37-48 Lehn Kenneth and Anil K Makhija (1996) EVA amp MVA as Performance Measures and
Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
Lin Ciang-Liang and Kuan Yuh-Lih (2007) An Association Study of Economic Value Added and Residual Income with Firm Value Journal of Risk Management Vol9 No1 March 2007pp 27-44
Lin Wen-Ren (2005) Evaluate Performance Measures in Taiwan Tourist Industry MA in
Finance Department National Kaohsiung Technology University
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ธ มหาว
ทยาลย
หอการ
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right
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TCC
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hts re
serve
d
79
Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
EMBA program Industrial economics National Central University Taiwan Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Martin JD and Petty JW (2000) Value-based management the corporate response
to the shareholder revolution Boston Massachusets Harward Business School Press
Mehdi Sheikholeslami (2001) EVA MVA and CEO Compensation American Business
Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
Michael Rago(2008) An Analysis of Economic Value Added MBA program Liberty University from httpdigitalcommonslibertyeducgiviewcontentcgiarticle=1031ampcontext=honors
Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of Applied Corporate Finance 9 no1 Spring 104-115
Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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ธ มหาว
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right
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hts re
serve
d
80
Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
Paul A Dierks and Ajay Patel (Nov1997) What is EVA and How Can It Help Your
Company Management Accounting 79 no5 52 PC Brewer G Chandra and CA Hock (Spring 1999) Economic value added (EVAreg)
its uses and limitations Society for the advancement of management (SAM) Adv Manage J pp 4ndash11
Pretorius JL (1997) Economic value added as an alternative method of valuation
Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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ธ มหาว
ทยาลย
หอการ
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ย
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right
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hts re
serve
d
81
Rawinun Ekaluksananon (2003) Study of relationship between economic value added and shareholder value of companies listed in SET MBA program Chulalongkorn University
Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Rennie P (1997) Finding the Best and the Worst Wealth Creators Business Review
Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
and MVA Are They Reliable Indicators of Future Stock Performance Journal of Investing Date posted December 19 2005 last revised December 19 2005
Rober T Kleiman (1999) Some New Evidence on EVA Companies Journal of Applied
Corporate Finance 12 no2 (Summer 1999)90-91 Rogerson WP (1997)Intertemporal Cost Allocation and Managerial Investment
Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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ทยาลย
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hts re
serve
d
82
Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
Russ Ray (2001)Economic Value Added Theory Evidence A Missing Link Business
Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
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ธ มหาว
ทยาลย
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hts re
serve
d
83
Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
Tokokeizai Magazine (2000)Top 1000 Japanese Corporation in EVA and MVA from httptwtrendmicrocomtwaboutnewsprarticle20070919092534html
Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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serve
d
84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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d
APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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d
88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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89
privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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91
international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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92
the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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94
Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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95
Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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96
Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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99
LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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101
Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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102
PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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3
equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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4
the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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THE RELATIONSHIP BETWEEN ECONOMIC VALUE ADDED AND STOCK PRICE RETURNS IN THAI ENERGY SECTOR
PENG FANG- FANG
A Thesis Submitted in Partial Fulfillment of the Requirements
For the Degree of Master of Business Administration Department of International Business
Graduate School University of the Thai Chamber of Commerce
2008
copy Copyright by University of the Thai Chamber of Commerce
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THESIS APPROVAL GRADUATE SCHOOL
Master of Business Administration
Degree International Business
Major Field
THE RELATIONSHIP BETWEEN ECONOMIC VALUE ADDED AND STOCK PRICE RETURN IN THAI ENERGY SECTOR
Peng Fang-Fang 2008
Name Graduation Year
Accepted by the Graduate School University of the Thai Chamber of Commerce in Partial Fulfillment of the Requirements for the Masterrsquos Degree
Dean Graduate School (Dr Ekachai Apisakkul)
Thesis Committee
Chairperson
(Dr Phusit Wonglorsaichon)
Thesis Advisor (Dr Kittiphun Khongsawatkiat)
helliphellip Thesis Co-Advisor (Dr Thasana Boonkwan)
helliphellip Member
(Dr Pussadee Polsaram)
External Committee
(Assoc Prof Sriaroon Resanond)
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Thesis Title The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Name Peng Fang-Fang Degree Master of Business Administration Major Field International Business Thesis Advisor Dr Kittiphun Khongsawatkiat Thesis Co-Advisor Dr Thasana Boonkwan Graduation Year 2008
ABSTRACT
In the eighties the rapid changes have led to a general dissatisfaction with traditional
performance measures One of the most popular mechanisms is Economic Value Added
(EVA) has been created by a US-based consulting firm called Stern Stewart amp Co The
company claimed that EVA can increase transparency for investors and managers
developed and trademarked Stern Stewart amp Co launched the concept of EVA and it
widespread as the financial management and incentive compensation system EVA has
been literally adopted by thousands of the leading firms all around the world EVA is not
constrained by the Generally Accepted Accounted Principle (or GAAP) so it also has its
critics Some experts suggested that EVA is not the best choice
An emerging literature of analyze whether EVA is highly associated with stock returns
than traditional performance measures has addressed the empirical issue Until now there
are only few EVA relevant studies in Thailand Thus this is an opportunity to
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start a research in this field The purpose of this study is to investigate if EVA can be
suitable for applying to the Thai energy sector which is were mostly affected the
performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can
better affect the operational performance than the traditional performance index
(including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby
stock returns
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has
the most significant relevance and finally one is EVA EVA has relationship with MVA
but can not affect MVA by regression analysis Thus EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index of the Thai energy sector However the researcher suggests that
any managers shareholders and participants can use EVA as an assistant tool with
traditional performance measures instant of replacing anyone
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ACKNOWLEDGEMENTS I would like to express my gratitude to the people who have played especially
important role in the development of this research First of all let me pay my deepest
acknowledgement to my supervisors DrKittiphun Khongsawatkiat and Dr Thassna
Boonkwan for their valuable advice and recommendations The excellent research method
course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my
key thinking partner MrWeera Weerakhajornsak for his professional directions and
generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr
Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its
final shape with their kindness critique
Perhaps the most important is the courage from my parents Mr Peng Han-Qing
and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard
times Of course my appreciation goes to all my friends whose sharing ideas and
comments are woven into the research I wish I could express my sincerely thanks for how
they have enriched my life
Peng Fang-Fang
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TABLE OF CONTENTS
Page ENGLISH ABSTRACT iv
THAI ABSTRACT vi
ACKNOWLEDGEMENTS viii
TABLE OF CONTENTShelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xi
LIST OF ABBREVIATION helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xii
LIST OF TABLES xiv
LIST OF FIGURES helliphelliphellip xv
Chapter 1 Introduction 1
State of the Problems 5 Objectives of the Study 6
Expected Benefits 7 Scope and limitations 7 Operation Definition 7 Organization of the Study 9
2 Literature Review 10 Traditional Performance Measures 11 Value-Based Management (VBM) 13 Market Value Added (MVA) 15
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TABLE OF CONTENTS (COUNTINUED)
Chapter Page From MVA to EVA 16 Economic Value Added (EVA)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 18 The Originsndash Residual Income (RI)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 17 The EVA Metric helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 19 The Elements of EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 21 Accounting Adjustmentshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 24 Advantages and Disadvantageshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 26 Related Research helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 33 Research in support of EVA as the best driver of MVAhelliphelliphelliphelliphelliphellip 33 Criticisms of EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 37
3 Research Methodology 42 Conceptual Frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 43 Research Designhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Population helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Data Collectionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 45
Hypotheseshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 49 Data Analysishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 50
4 Results of Analysis hellip 52 Analyze the innovation measure ndashEVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
Analyze the traditional measures (EPS ROA and ROE) helliphelliphellip 58 The results of all independent variableshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 59
5 Conclusion Discussion and Suggestion 62 Conclusion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 62
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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6
000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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21
relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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23
2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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35
turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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39
across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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60
is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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61
(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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63
should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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64
H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
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serve
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Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
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best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
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hts re
serve
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73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
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Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
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Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
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serve
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Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
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Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
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Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
zur Prognose der Peformance europscher Aktien Arbeitsberichte der Hochschule fur Bankwirtschaft Nr 27 Hochschule fur Bankwirtschaft ndash Private Fachhochschule der Bankakademie (ed) Dezember 2000 FrankfurtMain
Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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serve
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Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
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Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
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Corporate Excellence Journal of Business Strategy pp52ndash62 Joseph Chang (July 1997) Spreading EVA Chemical Market Report Kaplan RS amp Norton DP (1996) The Balance Scorecard Translating Strategy into
Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
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Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
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Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
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Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
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Lin Wen-Ren (2005) Evaluate Performance Measures in Taiwan Tourist Industry MA in
Finance Department National Kaohsiung Technology University
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Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
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Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
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Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
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added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
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Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
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Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
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Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
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ย
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serve
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Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
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Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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92
the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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101
Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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102
PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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serve
d
11
Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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THESIS APPROVAL GRADUATE SCHOOL
Master of Business Administration
Degree International Business
Major Field
THE RELATIONSHIP BETWEEN ECONOMIC VALUE ADDED AND STOCK PRICE RETURN IN THAI ENERGY SECTOR
Peng Fang-Fang 2008
Name Graduation Year
Accepted by the Graduate School University of the Thai Chamber of Commerce in Partial Fulfillment of the Requirements for the Masterrsquos Degree
Dean Graduate School (Dr Ekachai Apisakkul)
Thesis Committee
Chairperson
(Dr Phusit Wonglorsaichon)
Thesis Advisor (Dr Kittiphun Khongsawatkiat)
helliphellip Thesis Co-Advisor (Dr Thasana Boonkwan)
helliphellip Member
(Dr Pussadee Polsaram)
External Committee
(Assoc Prof Sriaroon Resanond)
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Thesis Title The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Name Peng Fang-Fang Degree Master of Business Administration Major Field International Business Thesis Advisor Dr Kittiphun Khongsawatkiat Thesis Co-Advisor Dr Thasana Boonkwan Graduation Year 2008
ABSTRACT
In the eighties the rapid changes have led to a general dissatisfaction with traditional
performance measures One of the most popular mechanisms is Economic Value Added
(EVA) has been created by a US-based consulting firm called Stern Stewart amp Co The
company claimed that EVA can increase transparency for investors and managers
developed and trademarked Stern Stewart amp Co launched the concept of EVA and it
widespread as the financial management and incentive compensation system EVA has
been literally adopted by thousands of the leading firms all around the world EVA is not
constrained by the Generally Accepted Accounted Principle (or GAAP) so it also has its
critics Some experts suggested that EVA is not the best choice
An emerging literature of analyze whether EVA is highly associated with stock returns
than traditional performance measures has addressed the empirical issue Until now there
are only few EVA relevant studies in Thailand Thus this is an opportunity to
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start a research in this field The purpose of this study is to investigate if EVA can be
suitable for applying to the Thai energy sector which is were mostly affected the
performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can
better affect the operational performance than the traditional performance index
(including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby
stock returns
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has
the most significant relevance and finally one is EVA EVA has relationship with MVA
but can not affect MVA by regression analysis Thus EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index of the Thai energy sector However the researcher suggests that
any managers shareholders and participants can use EVA as an assistant tool with
traditional performance measures instant of replacing anyone
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ACKNOWLEDGEMENTS I would like to express my gratitude to the people who have played especially
important role in the development of this research First of all let me pay my deepest
acknowledgement to my supervisors DrKittiphun Khongsawatkiat and Dr Thassna
Boonkwan for their valuable advice and recommendations The excellent research method
course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my
key thinking partner MrWeera Weerakhajornsak for his professional directions and
generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr
Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its
final shape with their kindness critique
Perhaps the most important is the courage from my parents Mr Peng Han-Qing
and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard
times Of course my appreciation goes to all my friends whose sharing ideas and
comments are woven into the research I wish I could express my sincerely thanks for how
they have enriched my life
Peng Fang-Fang
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TABLE OF CONTENTS
Page ENGLISH ABSTRACT iv
THAI ABSTRACT vi
ACKNOWLEDGEMENTS viii
TABLE OF CONTENTShelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xi
LIST OF ABBREVIATION helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xii
LIST OF TABLES xiv
LIST OF FIGURES helliphelliphellip xv
Chapter 1 Introduction 1
State of the Problems 5 Objectives of the Study 6
Expected Benefits 7 Scope and limitations 7 Operation Definition 7 Organization of the Study 9
2 Literature Review 10 Traditional Performance Measures 11 Value-Based Management (VBM) 13 Market Value Added (MVA) 15
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TABLE OF CONTENTS (COUNTINUED)
Chapter Page From MVA to EVA 16 Economic Value Added (EVA)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 18 The Originsndash Residual Income (RI)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 17 The EVA Metric helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 19 The Elements of EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 21 Accounting Adjustmentshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 24 Advantages and Disadvantageshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 26 Related Research helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 33 Research in support of EVA as the best driver of MVAhelliphelliphelliphelliphelliphellip 33 Criticisms of EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 37
3 Research Methodology 42 Conceptual Frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 43 Research Designhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Population helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Data Collectionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 45
Hypotheseshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 49 Data Analysishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 50
4 Results of Analysis hellip 52 Analyze the innovation measure ndashEVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
Analyze the traditional measures (EPS ROA and ROE) helliphelliphellip 58 The results of all independent variableshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 59
5 Conclusion Discussion and Suggestion 62 Conclusion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 62
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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6
000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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serve
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7
1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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8
Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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12
incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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14
managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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22
the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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23
2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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30
statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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31
(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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35
turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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37
Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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47
a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
Ahmad Ismail (2006) Is economic value added more associated with stock return than accounting earnings The UK evidence International Journal of Managerial Finance Vol 2 No 4 pp 343-353
Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Akiston H Hamburg J amp Ittner C (1997) Linking quality to profits Milwaukee WI
SQC Quality Press Armstrong M and Baron A (1998) Performance Management The New Realities
Institute of Personnel and Development London Andrew C Worthington and Tracey West (2001) Economic Value-Addedreg A Review of
the Theoretical and Empirical Literature Asian Review of Accounting 9(1) pp 67-86
Anderson A M Bey R P amp Weaver S C (2005) Economic Value Addedreg
Adjustments Much to Do About Nothing Retrieved January 2008 from httpwwwlehighedu~incbeugAttachmentsAnderson20EVA204-7-05pdf Anthony R (1973) Accounting for the cost of equity Harvard Business Review V5188-
102
Aswath Damodaran (2002) Economic Value Added (EVA) chapter EVA and MVA
Benedikt Wahler (2001) Economic Value Added A comprehensive Financial Management System Seminararbeit zur Erlangung eines Leistungsnachweises
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d
72
im Fach Risiko Management Biddle G C and Bowen R M (1997) Does EVA beat earnings Evidence on
associations with stock returns and firm values Journal of Accounting and Economics 301-336
Brottger R (1999) Economic Value Added The essence to creating real wealth
Unpublished Mumeo Department of Economics University of Stellenbosch Brealy RA and Myers SC (2000) Principles of Corporate Finance Irwin Burr
RidgeIllinois Brigham Eugene FLouis C Gapenski and Michael C Ehrhardt (1999) Financial
Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
China Business Daily News (2008Feb16)
httpwwwbjgzwgovcngzjcmzwz152200803170110htm Clinton BD amp Chen S (1998) Do New Performance Measures Measure
Up Management Accounting 80 4 38ndash44 Creelman J (1998) Building and implementing a Balanced Scorecard International
best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
Efficiency Fluorescent Fixtures by Photopia Program Kasen Bundit Journal vo9 no1Jan-Jun2008
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ธ มหาว
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hts re
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73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
Creation in an Emerging Market The Case of Saudi ArabiaInternational Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen (Sep1998) Economic Value Added as a management tool Helsiniki
School of Economics and Business Administration Retrieved January 2008 from httpwwwevanomicscomevastudyshtml
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
Theory of Investment The American Economic Review
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ธ มหาว
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hts re
serve
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74
Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
into results Journal of Applied Corporate Finance Fall Vol 13 No 3 pp44ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1994) EVA Fact and Fantasy Journal of Applied Corporate
Finance 7(2) 71-84 GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 George Athanassakos (2007) Value-based management EVA and stock price
performance in Canada Richard Ivey School of Business The University of Western Ontario London Canada Vol 45 No 9
Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
ลขสท
ธ มหาว
ทยาลย
หอการ
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right
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hts re
serve
d
75
Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
zur Prognose der Peformance europscher Aktien Arbeitsberichte der Hochschule fur Bankwirtschaft Nr 27 Hochschule fur Bankwirtschaft ndash Private Fachhochschule der Bankakademie (ed) Dezember 2000 FrankfurtMain
Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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ธ มหาว
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hts re
serve
d
76
httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1996) Evareg An integrated
financial management system European Financial Management Joel Stern G Bennett Stewart III and Donald H Chew Jr (1998) The EVA Financial
Management System in Chew Donald H jr(ed) The New Corporate Finance Where Theory Meets Practice 2 nd edition Boston 140-154
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
ลขสท
ธ มหาว
ทยาลย
หอการ
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right
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hts re
serve
d
77
Joel Stern (2008) The World of Finance Business Brief JuneJuly 2008 from httpwwwsternstewartcomresearchstudies2aspxID=1636
John A Kay and J A Kay (January 1993) Foundations of Corporate Success How
Business Strategies Add Value Oxford University Press USA John Ballow Henric Persson and Fred Knechtel (2001) EVA and the Chemical Industry
How Do Companies Rank EVA and the Chemical Industry How Do Companies Rank ICIS Chemical Business from httpwwwiciscomArticles20010903146008eva-and-the-chemical-industry-how-do-companies-rankhtml
Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Joseph Chang (July 1997) Spreading EVA Chemical Market Report Kaplan RS amp Norton DP (1996) The Balance Scorecard Translating Strategy into
Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
Keen Peter (1999) Economic Value Added in Keen Peter Every Managerrsquos Guide to
Business Processes internet document accessed 05022001 httpwwwpeterkeencomemgbp007htm
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ธ มหาว
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serve
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78
Knight James A (1998) Value based management developing a systematic approach to creating shareholder value New York USA Mc Graw-Hill companies
Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49 Lars Oxelheim and Clas Wihlborg (2001) Recognizing macroeconomic fluctuations in
value based management Journal of Applied Corporate Finance Vol 15 No 4 2003
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
TSMC Journal of Jen-Teh12838 P37-48 Lehn Kenneth and Anil K Makhija (1996) EVA amp MVA as Performance Measures and
Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
Lin Ciang-Liang and Kuan Yuh-Lih (2007) An Association Study of Economic Value Added and Residual Income with Firm Value Journal of Risk Management Vol9 No1 March 2007pp 27-44
Lin Wen-Ren (2005) Evaluate Performance Measures in Taiwan Tourist Industry MA in
Finance Department National Kaohsiung Technology University
ลขสท
ธ มหาว
ทยาลย
หอการ
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right
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hts re
serve
d
79
Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
EMBA program Industrial economics National Central University Taiwan Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Martin JD and Petty JW (2000) Value-based management the corporate response
to the shareholder revolution Boston Massachusets Harward Business School Press
Mehdi Sheikholeslami (2001) EVA MVA and CEO Compensation American Business
Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
Michael Rago(2008) An Analysis of Economic Value Added MBA program Liberty University from httpdigitalcommonslibertyeducgiviewcontentcgiarticle=1031ampcontext=honors
Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of Applied Corporate Finance 9 no1 Spring 104-115
Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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ธ มหาว
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hts re
serve
d
80
Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
Paul A Dierks and Ajay Patel (Nov1997) What is EVA and How Can It Help Your
Company Management Accounting 79 no5 52 PC Brewer G Chandra and CA Hock (Spring 1999) Economic value added (EVAreg)
its uses and limitations Society for the advancement of management (SAM) Adv Manage J pp 4ndash11
Pretorius JL (1997) Economic value added as an alternative method of valuation
Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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ธ มหาว
ทยาลย
หอการ
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ย
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right
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hts re
serve
d
81
Rawinun Ekaluksananon (2003) Study of relationship between economic value added and shareholder value of companies listed in SET MBA program Chulalongkorn University
Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Rennie P (1997) Finding the Best and the Worst Wealth Creators Business Review
Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
and MVA Are They Reliable Indicators of Future Stock Performance Journal of Investing Date posted December 19 2005 last revised December 19 2005
Rober T Kleiman (1999) Some New Evidence on EVA Companies Journal of Applied
Corporate Finance 12 no2 (Summer 1999)90-91 Rogerson WP (1997)Intertemporal Cost Allocation and Managerial Investment
Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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hts re
serve
d
82
Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
Russ Ray (2001)Economic Value Added Theory Evidence A Missing Link Business
Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
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ธ มหาว
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hts re
serve
d
83
Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
Tokokeizai Magazine (2000)Top 1000 Japanese Corporation in EVA and MVA from httptwtrendmicrocomtwaboutnewsprarticle20070919092534html
Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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serve
d
84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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serve
d
APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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d
88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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89
privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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d
91
international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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d
92
the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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2
measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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Thesis Title The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Name Peng Fang-Fang Degree Master of Business Administration Major Field International Business Thesis Advisor Dr Kittiphun Khongsawatkiat Thesis Co-Advisor Dr Thasana Boonkwan Graduation Year 2008
ABSTRACT
In the eighties the rapid changes have led to a general dissatisfaction with traditional
performance measures One of the most popular mechanisms is Economic Value Added
(EVA) has been created by a US-based consulting firm called Stern Stewart amp Co The
company claimed that EVA can increase transparency for investors and managers
developed and trademarked Stern Stewart amp Co launched the concept of EVA and it
widespread as the financial management and incentive compensation system EVA has
been literally adopted by thousands of the leading firms all around the world EVA is not
constrained by the Generally Accepted Accounted Principle (or GAAP) so it also has its
critics Some experts suggested that EVA is not the best choice
An emerging literature of analyze whether EVA is highly associated with stock returns
than traditional performance measures has addressed the empirical issue Until now there
are only few EVA relevant studies in Thailand Thus this is an opportunity to
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start a research in this field The purpose of this study is to investigate if EVA can be
suitable for applying to the Thai energy sector which is were mostly affected the
performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can
better affect the operational performance than the traditional performance index
(including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby
stock returns
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has
the most significant relevance and finally one is EVA EVA has relationship with MVA
but can not affect MVA by regression analysis Thus EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index of the Thai energy sector However the researcher suggests that
any managers shareholders and participants can use EVA as an assistant tool with
traditional performance measures instant of replacing anyone
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ACKNOWLEDGEMENTS I would like to express my gratitude to the people who have played especially
important role in the development of this research First of all let me pay my deepest
acknowledgement to my supervisors DrKittiphun Khongsawatkiat and Dr Thassna
Boonkwan for their valuable advice and recommendations The excellent research method
course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my
key thinking partner MrWeera Weerakhajornsak for his professional directions and
generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr
Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its
final shape with their kindness critique
Perhaps the most important is the courage from my parents Mr Peng Han-Qing
and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard
times Of course my appreciation goes to all my friends whose sharing ideas and
comments are woven into the research I wish I could express my sincerely thanks for how
they have enriched my life
Peng Fang-Fang
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TABLE OF CONTENTS
Page ENGLISH ABSTRACT iv
THAI ABSTRACT vi
ACKNOWLEDGEMENTS viii
TABLE OF CONTENTShelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xi
LIST OF ABBREVIATION helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xii
LIST OF TABLES xiv
LIST OF FIGURES helliphelliphellip xv
Chapter 1 Introduction 1
State of the Problems 5 Objectives of the Study 6
Expected Benefits 7 Scope and limitations 7 Operation Definition 7 Organization of the Study 9
2 Literature Review 10 Traditional Performance Measures 11 Value-Based Management (VBM) 13 Market Value Added (MVA) 15
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TABLE OF CONTENTS (COUNTINUED)
Chapter Page From MVA to EVA 16 Economic Value Added (EVA)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 18 The Originsndash Residual Income (RI)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 17 The EVA Metric helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 19 The Elements of EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 21 Accounting Adjustmentshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 24 Advantages and Disadvantageshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 26 Related Research helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 33 Research in support of EVA as the best driver of MVAhelliphelliphelliphelliphelliphellip 33 Criticisms of EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 37
3 Research Methodology 42 Conceptual Frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 43 Research Designhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Population helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Data Collectionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 45
Hypotheseshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 49 Data Analysishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 50
4 Results of Analysis hellip 52 Analyze the innovation measure ndashEVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
Analyze the traditional measures (EPS ROA and ROE) helliphelliphellip 58 The results of all independent variableshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 59
5 Conclusion Discussion and Suggestion 62 Conclusion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 62
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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6
000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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18
earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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23
2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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35
turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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37
Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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38
EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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60
is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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61
(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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64
H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
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Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Akiston H Hamburg J amp Ittner C (1997) Linking quality to profits Milwaukee WI
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Institute of Personnel and Development London Andrew C Worthington and Tracey West (2001) Economic Value-Addedreg A Review of
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Anderson A M Bey R P amp Weaver S C (2005) Economic Value Addedreg
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102
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serve
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im Fach Risiko Management Biddle G C and Bowen R M (1997) Does EVA beat earnings Evidence on
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RidgeIllinois Brigham Eugene FLouis C Gapenski and Michael C Ehrhardt (1999) Financial
Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
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httpwwwbjgzwgovcngzjcmzwz152200803170110htm Clinton BD amp Chen S (1998) Do New Performance Measures Measure
Up Management Accounting 80 4 38ndash44 Creelman J (1998) Building and implementing a Balanced Scorecard International
best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
Efficiency Fluorescent Fixtures by Photopia Program Kasen Bundit Journal vo9 no1Jan-Jun2008
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hts re
serve
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73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
Creation in an Emerging Market The Case of Saudi ArabiaInternational Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen (Sep1998) Economic Value Added as a management tool Helsiniki
School of Economics and Business Administration Retrieved January 2008 from httpwwwevanomicscomevastudyshtml
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
Theory of Investment The American Economic Review
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serve
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Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
into results Journal of Applied Corporate Finance Fall Vol 13 No 3 pp44ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
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Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
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Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
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Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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serve
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Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
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Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
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Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Joseph Chang (July 1997) Spreading EVA Chemical Market Report Kaplan RS amp Norton DP (1996) The Balance Scorecard Translating Strategy into
Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
Keen Peter (1999) Economic Value Added in Keen Peter Every Managerrsquos Guide to
Business Processes internet document accessed 05022001 httpwwwpeterkeencomemgbp007htm
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Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49 Lars Oxelheim and Clas Wihlborg (2001) Recognizing macroeconomic fluctuations in
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Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
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Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
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Lin Wen-Ren (2005) Evaluate Performance Measures in Taiwan Tourist Industry MA in
Finance Department National Kaohsiung Technology University
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Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
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to the shareholder revolution Boston Massachusets Harward Business School Press
Mehdi Sheikholeslami (2001) EVA MVA and CEO Compensation American Business
Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
Michael Rago(2008) An Analysis of Economic Value Added MBA program Liberty University from httpdigitalcommonslibertyeducgiviewcontentcgiarticle=1031ampcontext=honors
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Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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serve
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Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
Paul A Dierks and Ajay Patel (Nov1997) What is EVA and How Can It Help Your
Company Management Accounting 79 no5 52 PC Brewer G Chandra and CA Hock (Spring 1999) Economic value added (EVAreg)
its uses and limitations Society for the advancement of management (SAM) Adv Manage J pp 4ndash11
Pretorius JL (1997) Economic value added as an alternative method of valuation
Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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ธ มหาว
ทยาลย
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hts re
serve
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Rawinun Ekaluksananon (2003) Study of relationship between economic value added and shareholder value of companies listed in SET MBA program Chulalongkorn University
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edition Thomson-South Western Cincinnati Rennie P (1997) Finding the Best and the Worst Wealth Creators Business Review
Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
and MVA Are They Reliable Indicators of Future Stock Performance Journal of Investing Date posted December 19 2005 last revised December 19 2005
Rober T Kleiman (1999) Some New Evidence on EVA Companies Journal of Applied
Corporate Finance 12 no2 (Summer 1999)90-91 Rogerson WP (1997)Intertemporal Cost Allocation and Managerial Investment
Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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ทยาลย
หอการ
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d
82
Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
Russ Ray (2001)Economic Value Added Theory Evidence A Missing Link Business
Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
ลขสท
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83
Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
Tokokeizai Magazine (2000)Top 1000 Japanese Corporation in EVA and MVA from httptwtrendmicrocomtwaboutnewsprarticle20070919092534html
Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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89
privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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91
international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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92
the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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101
Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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11
Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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iv
start a research in this field The purpose of this study is to investigate if EVA can be
suitable for applying to the Thai energy sector which is were mostly affected the
performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can
better affect the operational performance than the traditional performance index
(including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby
stock returns
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has
the most significant relevance and finally one is EVA EVA has relationship with MVA
but can not affect MVA by regression analysis Thus EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index of the Thai energy sector However the researcher suggests that
any managers shareholders and participants can use EVA as an assistant tool with
traditional performance measures instant of replacing anyone
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ACKNOWLEDGEMENTS I would like to express my gratitude to the people who have played especially
important role in the development of this research First of all let me pay my deepest
acknowledgement to my supervisors DrKittiphun Khongsawatkiat and Dr Thassna
Boonkwan for their valuable advice and recommendations The excellent research method
course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my
key thinking partner MrWeera Weerakhajornsak for his professional directions and
generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr
Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its
final shape with their kindness critique
Perhaps the most important is the courage from my parents Mr Peng Han-Qing
and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard
times Of course my appreciation goes to all my friends whose sharing ideas and
comments are woven into the research I wish I could express my sincerely thanks for how
they have enriched my life
Peng Fang-Fang
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TABLE OF CONTENTS
Page ENGLISH ABSTRACT iv
THAI ABSTRACT vi
ACKNOWLEDGEMENTS viii
TABLE OF CONTENTShelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xi
LIST OF ABBREVIATION helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xii
LIST OF TABLES xiv
LIST OF FIGURES helliphelliphellip xv
Chapter 1 Introduction 1
State of the Problems 5 Objectives of the Study 6
Expected Benefits 7 Scope and limitations 7 Operation Definition 7 Organization of the Study 9
2 Literature Review 10 Traditional Performance Measures 11 Value-Based Management (VBM) 13 Market Value Added (MVA) 15
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TABLE OF CONTENTS (COUNTINUED)
Chapter Page From MVA to EVA 16 Economic Value Added (EVA)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 18 The Originsndash Residual Income (RI)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 17 The EVA Metric helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 19 The Elements of EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 21 Accounting Adjustmentshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 24 Advantages and Disadvantageshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 26 Related Research helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 33 Research in support of EVA as the best driver of MVAhelliphelliphelliphelliphelliphellip 33 Criticisms of EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 37
3 Research Methodology 42 Conceptual Frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 43 Research Designhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Population helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Data Collectionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 45
Hypotheseshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 49 Data Analysishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 50
4 Results of Analysis hellip 52 Analyze the innovation measure ndashEVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
Analyze the traditional measures (EPS ROA and ROE) helliphelliphellip 58 The results of all independent variableshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 59
5 Conclusion Discussion and Suggestion 62 Conclusion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 62
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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xii
LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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1
CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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5
12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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6
000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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7
1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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12
incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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14
managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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27
Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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30
statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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31
(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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35
turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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47
a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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d
BIBLIOGRAPHY
Ahmad Ismail (2006) Is economic value added more associated with stock return than accounting earnings The UK evidence International Journal of Managerial Finance Vol 2 No 4 pp 343-353
Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Akiston H Hamburg J amp Ittner C (1997) Linking quality to profits Milwaukee WI
SQC Quality Press Armstrong M and Baron A (1998) Performance Management The New Realities
Institute of Personnel and Development London Andrew C Worthington and Tracey West (2001) Economic Value-Addedreg A Review of
the Theoretical and Empirical Literature Asian Review of Accounting 9(1) pp 67-86
Anderson A M Bey R P amp Weaver S C (2005) Economic Value Addedreg
Adjustments Much to Do About Nothing Retrieved January 2008 from httpwwwlehighedu~incbeugAttachmentsAnderson20EVA204-7-05pdf Anthony R (1973) Accounting for the cost of equity Harvard Business Review V5188-
102
Aswath Damodaran (2002) Economic Value Added (EVA) chapter EVA and MVA
Benedikt Wahler (2001) Economic Value Added A comprehensive Financial Management System Seminararbeit zur Erlangung eines Leistungsnachweises
ลขสท
ธ มหาว
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serve
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72
im Fach Risiko Management Biddle G C and Bowen R M (1997) Does EVA beat earnings Evidence on
associations with stock returns and firm values Journal of Accounting and Economics 301-336
Brottger R (1999) Economic Value Added The essence to creating real wealth
Unpublished Mumeo Department of Economics University of Stellenbosch Brealy RA and Myers SC (2000) Principles of Corporate Finance Irwin Burr
RidgeIllinois Brigham Eugene FLouis C Gapenski and Michael C Ehrhardt (1999) Financial
Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
China Business Daily News (2008Feb16)
httpwwwbjgzwgovcngzjcmzwz152200803170110htm Clinton BD amp Chen S (1998) Do New Performance Measures Measure
Up Management Accounting 80 4 38ndash44 Creelman J (1998) Building and implementing a Balanced Scorecard International
best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
Efficiency Fluorescent Fixtures by Photopia Program Kasen Bundit Journal vo9 no1Jan-Jun2008
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ธ มหาว
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หอการ
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right
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hts re
serve
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73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
Creation in an Emerging Market The Case of Saudi ArabiaInternational Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen (Sep1998) Economic Value Added as a management tool Helsiniki
School of Economics and Business Administration Retrieved January 2008 from httpwwwevanomicscomevastudyshtml
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
Theory of Investment The American Economic Review
ลขสท
ธ มหาว
ทยาลย
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right
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hts re
serve
d
74
Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
into results Journal of Applied Corporate Finance Fall Vol 13 No 3 pp44ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1994) EVA Fact and Fantasy Journal of Applied Corporate
Finance 7(2) 71-84 GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 George Athanassakos (2007) Value-based management EVA and stock price
performance in Canada Richard Ivey School of Business The University of Western Ontario London Canada Vol 45 No 9
Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
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ธ มหาว
ทยาลย
หอการ
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ย
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right
by U
TCC
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hts re
serve
d
75
Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
zur Prognose der Peformance europscher Aktien Arbeitsberichte der Hochschule fur Bankwirtschaft Nr 27 Hochschule fur Bankwirtschaft ndash Private Fachhochschule der Bankakademie (ed) Dezember 2000 FrankfurtMain
Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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ธ มหาว
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หอการ
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right
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hts re
serve
d
76
httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1996) Evareg An integrated
financial management system European Financial Management Joel Stern G Bennett Stewart III and Donald H Chew Jr (1998) The EVA Financial
Management System in Chew Donald H jr(ed) The New Corporate Finance Where Theory Meets Practice 2 nd edition Boston 140-154
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
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ธ มหาว
ทยาลย
หอการ
คาไท
ย
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right
by U
TCC
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hts re
serve
d
77
Joel Stern (2008) The World of Finance Business Brief JuneJuly 2008 from httpwwwsternstewartcomresearchstudies2aspxID=1636
John A Kay and J A Kay (January 1993) Foundations of Corporate Success How
Business Strategies Add Value Oxford University Press USA John Ballow Henric Persson and Fred Knechtel (2001) EVA and the Chemical Industry
How Do Companies Rank EVA and the Chemical Industry How Do Companies Rank ICIS Chemical Business from httpwwwiciscomArticles20010903146008eva-and-the-chemical-industry-how-do-companies-rankhtml
Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Joseph Chang (July 1997) Spreading EVA Chemical Market Report Kaplan RS amp Norton DP (1996) The Balance Scorecard Translating Strategy into
Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
Keen Peter (1999) Economic Value Added in Keen Peter Every Managerrsquos Guide to
Business Processes internet document accessed 05022001 httpwwwpeterkeencomemgbp007htm
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ธ มหาว
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right
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hts re
serve
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78
Knight James A (1998) Value based management developing a systematic approach to creating shareholder value New York USA Mc Graw-Hill companies
Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49 Lars Oxelheim and Clas Wihlborg (2001) Recognizing macroeconomic fluctuations in
value based management Journal of Applied Corporate Finance Vol 15 No 4 2003
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
TSMC Journal of Jen-Teh12838 P37-48 Lehn Kenneth and Anil K Makhija (1996) EVA amp MVA as Performance Measures and
Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
Lin Ciang-Liang and Kuan Yuh-Lih (2007) An Association Study of Economic Value Added and Residual Income with Firm Value Journal of Risk Management Vol9 No1 March 2007pp 27-44
Lin Wen-Ren (2005) Evaluate Performance Measures in Taiwan Tourist Industry MA in
Finance Department National Kaohsiung Technology University
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ธ มหาว
ทยาลย
หอการ
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hts re
serve
d
79
Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
EMBA program Industrial economics National Central University Taiwan Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Martin JD and Petty JW (2000) Value-based management the corporate response
to the shareholder revolution Boston Massachusets Harward Business School Press
Mehdi Sheikholeslami (2001) EVA MVA and CEO Compensation American Business
Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
Michael Rago(2008) An Analysis of Economic Value Added MBA program Liberty University from httpdigitalcommonslibertyeducgiviewcontentcgiarticle=1031ampcontext=honors
Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of Applied Corporate Finance 9 no1 Spring 104-115
Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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ธ มหาว
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right
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hts re
serve
d
80
Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
Paul A Dierks and Ajay Patel (Nov1997) What is EVA and How Can It Help Your
Company Management Accounting 79 no5 52 PC Brewer G Chandra and CA Hock (Spring 1999) Economic value added (EVAreg)
its uses and limitations Society for the advancement of management (SAM) Adv Manage J pp 4ndash11
Pretorius JL (1997) Economic value added as an alternative method of valuation
Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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ธ มหาว
ทยาลย
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ย
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right
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hts re
serve
d
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Rawinun Ekaluksananon (2003) Study of relationship between economic value added and shareholder value of companies listed in SET MBA program Chulalongkorn University
Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Rennie P (1997) Finding the Best and the Worst Wealth Creators Business Review
Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
and MVA Are They Reliable Indicators of Future Stock Performance Journal of Investing Date posted December 19 2005 last revised December 19 2005
Rober T Kleiman (1999) Some New Evidence on EVA Companies Journal of Applied
Corporate Finance 12 no2 (Summer 1999)90-91 Rogerson WP (1997)Intertemporal Cost Allocation and Managerial Investment
Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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right
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hts re
serve
d
82
Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
Russ Ray (2001)Economic Value Added Theory Evidence A Missing Link Business
Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
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ธ มหาว
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hts re
serve
d
83
Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
Tokokeizai Magazine (2000)Top 1000 Japanese Corporation in EVA and MVA from httptwtrendmicrocomtwaboutnewsprarticle20070919092534html
Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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serve
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84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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d
APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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89
privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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91
international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
ลขสท
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the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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ธ มหาว
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Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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viii
ACKNOWLEDGEMENTS I would like to express my gratitude to the people who have played especially
important role in the development of this research First of all let me pay my deepest
acknowledgement to my supervisors DrKittiphun Khongsawatkiat and Dr Thassna
Boonkwan for their valuable advice and recommendations The excellent research method
course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my
key thinking partner MrWeera Weerakhajornsak for his professional directions and
generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr
Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its
final shape with their kindness critique
Perhaps the most important is the courage from my parents Mr Peng Han-Qing
and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard
times Of course my appreciation goes to all my friends whose sharing ideas and
comments are woven into the research I wish I could express my sincerely thanks for how
they have enriched my life
Peng Fang-Fang
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TABLE OF CONTENTS
Page ENGLISH ABSTRACT iv
THAI ABSTRACT vi
ACKNOWLEDGEMENTS viii
TABLE OF CONTENTShelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xi
LIST OF ABBREVIATION helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xii
LIST OF TABLES xiv
LIST OF FIGURES helliphelliphellip xv
Chapter 1 Introduction 1
State of the Problems 5 Objectives of the Study 6
Expected Benefits 7 Scope and limitations 7 Operation Definition 7 Organization of the Study 9
2 Literature Review 10 Traditional Performance Measures 11 Value-Based Management (VBM) 13 Market Value Added (MVA) 15
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TABLE OF CONTENTS (COUNTINUED)
Chapter Page From MVA to EVA 16 Economic Value Added (EVA)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 18 The Originsndash Residual Income (RI)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 17 The EVA Metric helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 19 The Elements of EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 21 Accounting Adjustmentshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 24 Advantages and Disadvantageshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 26 Related Research helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 33 Research in support of EVA as the best driver of MVAhelliphelliphelliphelliphelliphellip 33 Criticisms of EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 37
3 Research Methodology 42 Conceptual Frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 43 Research Designhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Population helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Data Collectionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 45
Hypotheseshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 49 Data Analysishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 50
4 Results of Analysis hellip 52 Analyze the innovation measure ndashEVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
Analyze the traditional measures (EPS ROA and ROE) helliphelliphellip 58 The results of all independent variableshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 59
5 Conclusion Discussion and Suggestion 62 Conclusion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 62
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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xii
LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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6
000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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d
CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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11
21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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23
2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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37
Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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39
across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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60
is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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63
should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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64
H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
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102
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ธ มหาว
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serve
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Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
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best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
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hts re
serve
d
73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
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Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
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Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
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serve
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Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
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Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
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Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
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Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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serve
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Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
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Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
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Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
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Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
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Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
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Finance Department National Kaohsiung Technology University
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Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
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Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
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Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
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Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
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Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
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Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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serve
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Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
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Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
ลขสท
ธ มหาว
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หอการ
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83
Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
Tokokeizai Magazine (2000)Top 1000 Japanese Corporation in EVA and MVA from httptwtrendmicrocomtwaboutnewsprarticle20070919092534html
Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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91
international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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92
the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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101
Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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102
PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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11
Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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TABLE OF CONTENTS
Page ENGLISH ABSTRACT iv
THAI ABSTRACT vi
ACKNOWLEDGEMENTS viii
TABLE OF CONTENTShelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xi
LIST OF ABBREVIATION helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip xii
LIST OF TABLES xiv
LIST OF FIGURES helliphelliphellip xv
Chapter 1 Introduction 1
State of the Problems 5 Objectives of the Study 6
Expected Benefits 7 Scope and limitations 7 Operation Definition 7 Organization of the Study 9
2 Literature Review 10 Traditional Performance Measures 11 Value-Based Management (VBM) 13 Market Value Added (MVA) 15
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TABLE OF CONTENTS (COUNTINUED)
Chapter Page From MVA to EVA 16 Economic Value Added (EVA)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 18 The Originsndash Residual Income (RI)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 17 The EVA Metric helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 19 The Elements of EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 21 Accounting Adjustmentshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 24 Advantages and Disadvantageshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 26 Related Research helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 33 Research in support of EVA as the best driver of MVAhelliphelliphelliphelliphelliphellip 33 Criticisms of EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 37
3 Research Methodology 42 Conceptual Frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 43 Research Designhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Population helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Data Collectionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 45
Hypotheseshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 49 Data Analysishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 50
4 Results of Analysis hellip 52 Analyze the innovation measure ndashEVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
Analyze the traditional measures (EPS ROA and ROE) helliphelliphellip 58 The results of all independent variableshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 59
5 Conclusion Discussion and Suggestion 62 Conclusion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 62
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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7
1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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11
21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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12
incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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14
managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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30
statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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31
(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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35
turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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37
Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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50
H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
Ahmad Ismail (2006) Is economic value added more associated with stock return than accounting earnings The UK evidence International Journal of Managerial Finance Vol 2 No 4 pp 343-353
Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Akiston H Hamburg J amp Ittner C (1997) Linking quality to profits Milwaukee WI
SQC Quality Press Armstrong M and Baron A (1998) Performance Management The New Realities
Institute of Personnel and Development London Andrew C Worthington and Tracey West (2001) Economic Value-Addedreg A Review of
the Theoretical and Empirical Literature Asian Review of Accounting 9(1) pp 67-86
Anderson A M Bey R P amp Weaver S C (2005) Economic Value Addedreg
Adjustments Much to Do About Nothing Retrieved January 2008 from httpwwwlehighedu~incbeugAttachmentsAnderson20EVA204-7-05pdf Anthony R (1973) Accounting for the cost of equity Harvard Business Review V5188-
102
Aswath Damodaran (2002) Economic Value Added (EVA) chapter EVA and MVA
Benedikt Wahler (2001) Economic Value Added A comprehensive Financial Management System Seminararbeit zur Erlangung eines Leistungsnachweises
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72
im Fach Risiko Management Biddle G C and Bowen R M (1997) Does EVA beat earnings Evidence on
associations with stock returns and firm values Journal of Accounting and Economics 301-336
Brottger R (1999) Economic Value Added The essence to creating real wealth
Unpublished Mumeo Department of Economics University of Stellenbosch Brealy RA and Myers SC (2000) Principles of Corporate Finance Irwin Burr
RidgeIllinois Brigham Eugene FLouis C Gapenski and Michael C Ehrhardt (1999) Financial
Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
China Business Daily News (2008Feb16)
httpwwwbjgzwgovcngzjcmzwz152200803170110htm Clinton BD amp Chen S (1998) Do New Performance Measures Measure
Up Management Accounting 80 4 38ndash44 Creelman J (1998) Building and implementing a Balanced Scorecard International
best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
Efficiency Fluorescent Fixtures by Photopia Program Kasen Bundit Journal vo9 no1Jan-Jun2008
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73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
Creation in an Emerging Market The Case of Saudi ArabiaInternational Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen (Sep1998) Economic Value Added as a management tool Helsiniki
School of Economics and Business Administration Retrieved January 2008 from httpwwwevanomicscomevastudyshtml
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
Theory of Investment The American Economic Review
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serve
d
74
Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
into results Journal of Applied Corporate Finance Fall Vol 13 No 3 pp44ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1994) EVA Fact and Fantasy Journal of Applied Corporate
Finance 7(2) 71-84 GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 George Athanassakos (2007) Value-based management EVA and stock price
performance in Canada Richard Ivey School of Business The University of Western Ontario London Canada Vol 45 No 9
Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
ลขสท
ธ มหาว
ทยาลย
หอการ
คาไท
ย
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right
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TCC
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hts re
serve
d
75
Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
zur Prognose der Peformance europscher Aktien Arbeitsberichte der Hochschule fur Bankwirtschaft Nr 27 Hochschule fur Bankwirtschaft ndash Private Fachhochschule der Bankakademie (ed) Dezember 2000 FrankfurtMain
Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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ธ มหาว
ทยาลย
หอการ
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hts re
serve
d
76
httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1996) Evareg An integrated
financial management system European Financial Management Joel Stern G Bennett Stewart III and Donald H Chew Jr (1998) The EVA Financial
Management System in Chew Donald H jr(ed) The New Corporate Finance Where Theory Meets Practice 2 nd edition Boston 140-154
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
ลขสท
ธ มหาว
ทยาลย
หอการ
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ย
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right
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TCC
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hts re
serve
d
77
Joel Stern (2008) The World of Finance Business Brief JuneJuly 2008 from httpwwwsternstewartcomresearchstudies2aspxID=1636
John A Kay and J A Kay (January 1993) Foundations of Corporate Success How
Business Strategies Add Value Oxford University Press USA John Ballow Henric Persson and Fred Knechtel (2001) EVA and the Chemical Industry
How Do Companies Rank EVA and the Chemical Industry How Do Companies Rank ICIS Chemical Business from httpwwwiciscomArticles20010903146008eva-and-the-chemical-industry-how-do-companies-rankhtml
Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Joseph Chang (July 1997) Spreading EVA Chemical Market Report Kaplan RS amp Norton DP (1996) The Balance Scorecard Translating Strategy into
Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
Keen Peter (1999) Economic Value Added in Keen Peter Every Managerrsquos Guide to
Business Processes internet document accessed 05022001 httpwwwpeterkeencomemgbp007htm
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ธ มหาว
ทยาลย
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hts re
serve
d
78
Knight James A (1998) Value based management developing a systematic approach to creating shareholder value New York USA Mc Graw-Hill companies
Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49 Lars Oxelheim and Clas Wihlborg (2001) Recognizing macroeconomic fluctuations in
value based management Journal of Applied Corporate Finance Vol 15 No 4 2003
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
TSMC Journal of Jen-Teh12838 P37-48 Lehn Kenneth and Anil K Makhija (1996) EVA amp MVA as Performance Measures and
Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
Lin Ciang-Liang and Kuan Yuh-Lih (2007) An Association Study of Economic Value Added and Residual Income with Firm Value Journal of Risk Management Vol9 No1 March 2007pp 27-44
Lin Wen-Ren (2005) Evaluate Performance Measures in Taiwan Tourist Industry MA in
Finance Department National Kaohsiung Technology University
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ธ มหาว
ทยาลย
หอการ
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right
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hts re
serve
d
79
Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
EMBA program Industrial economics National Central University Taiwan Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Martin JD and Petty JW (2000) Value-based management the corporate response
to the shareholder revolution Boston Massachusets Harward Business School Press
Mehdi Sheikholeslami (2001) EVA MVA and CEO Compensation American Business
Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
Michael Rago(2008) An Analysis of Economic Value Added MBA program Liberty University from httpdigitalcommonslibertyeducgiviewcontentcgiarticle=1031ampcontext=honors
Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of Applied Corporate Finance 9 no1 Spring 104-115
Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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ธ มหาว
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hts re
serve
d
80
Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
Paul A Dierks and Ajay Patel (Nov1997) What is EVA and How Can It Help Your
Company Management Accounting 79 no5 52 PC Brewer G Chandra and CA Hock (Spring 1999) Economic value added (EVAreg)
its uses and limitations Society for the advancement of management (SAM) Adv Manage J pp 4ndash11
Pretorius JL (1997) Economic value added as an alternative method of valuation
Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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ธ มหาว
ทยาลย
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ย
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right
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hts re
serve
d
81
Rawinun Ekaluksananon (2003) Study of relationship between economic value added and shareholder value of companies listed in SET MBA program Chulalongkorn University
Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Rennie P (1997) Finding the Best and the Worst Wealth Creators Business Review
Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
and MVA Are They Reliable Indicators of Future Stock Performance Journal of Investing Date posted December 19 2005 last revised December 19 2005
Rober T Kleiman (1999) Some New Evidence on EVA Companies Journal of Applied
Corporate Finance 12 no2 (Summer 1999)90-91 Rogerson WP (1997)Intertemporal Cost Allocation and Managerial Investment
Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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hts re
serve
d
82
Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
Russ Ray (2001)Economic Value Added Theory Evidence A Missing Link Business
Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
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ธ มหาว
ทยาลย
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hts re
serve
d
83
Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
Tokokeizai Magazine (2000)Top 1000 Japanese Corporation in EVA and MVA from httptwtrendmicrocomtwaboutnewsprarticle20070919092534html
Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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serve
d
84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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serve
d
APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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d
88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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89
privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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91
international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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92
the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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94
Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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97
Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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98
Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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99
LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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101
Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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102
PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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2
measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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ธ มหาว
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Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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TABLE OF CONTENTS (COUNTINUED)
Chapter Page From MVA to EVA 16 Economic Value Added (EVA)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 18 The Originsndash Residual Income (RI)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 17 The EVA Metric helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 19 The Elements of EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 21 Accounting Adjustmentshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 24 Advantages and Disadvantageshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 26 Related Research helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 33 Research in support of EVA as the best driver of MVAhelliphelliphelliphelliphelliphellip 33 Criticisms of EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 37
3 Research Methodology 42 Conceptual Frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 43 Research Designhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Population helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44 Data Collectionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 45
Hypotheseshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 49 Data Analysishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 50
4 Results of Analysis hellip 52 Analyze the innovation measure ndashEVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
Analyze the traditional measures (EPS ROA and ROE) helliphelliphellip 58 The results of all independent variableshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 59
5 Conclusion Discussion and Suggestion 62 Conclusion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 62
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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6
000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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7
1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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d
CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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11
21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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21
relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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41
1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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64
H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
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Institute of Personnel and Development London Andrew C Worthington and Tracey West (2001) Economic Value-Addedreg A Review of
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Anderson A M Bey R P amp Weaver S C (2005) Economic Value Addedreg
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102
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ธ มหาว
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serve
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im Fach Risiko Management Biddle G C and Bowen R M (1997) Does EVA beat earnings Evidence on
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RidgeIllinois Brigham Eugene FLouis C Gapenski and Michael C Ehrhardt (1999) Financial
Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
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httpwwwbjgzwgovcngzjcmzwz152200803170110htm Clinton BD amp Chen S (1998) Do New Performance Measures Measure
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best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
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ย
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right
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hts re
serve
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73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
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Esa Maumlkelaumlinen (Sep1998) Economic Value Added as a management tool Helsiniki
School of Economics and Business Administration Retrieved January 2008 from httpwwwevanomicscomevastudyshtml
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
Theory of Investment The American Economic Review
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ธ มหาว
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serve
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74
Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
into results Journal of Applied Corporate Finance Fall Vol 13 No 3 pp44ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1994) EVA Fact and Fantasy Journal of Applied Corporate
Finance 7(2) 71-84 GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 George Athanassakos (2007) Value-based management EVA and stock price
performance in Canada Richard Ivey School of Business The University of Western Ontario London Canada Vol 45 No 9
Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
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ธ มหาว
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ย
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hts re
serve
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Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
zur Prognose der Peformance europscher Aktien Arbeitsberichte der Hochschule fur Bankwirtschaft Nr 27 Hochschule fur Bankwirtschaft ndash Private Fachhochschule der Bankakademie (ed) Dezember 2000 FrankfurtMain
Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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serve
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Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
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Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
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ธ มหาว
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hts re
serve
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Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
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Graduated School of Accounting National Taiwan University
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Finance Department National Kaohsiung Technology University
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Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
Michael Rago(2008) An Analysis of Economic Value Added MBA program Liberty University from httpdigitalcommonslibertyeducgiviewcontentcgiarticle=1031ampcontext=honors
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Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
Paul A Dierks and Ajay Patel (Nov1997) What is EVA and How Can It Help Your
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Pretorius JL (1997) Economic value added as an alternative method of valuation
Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
and MVA Are They Reliable Indicators of Future Stock Performance Journal of Investing Date posted December 19 2005 last revised December 19 2005
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Corporate Finance 12 no2 (Summer 1999)90-91 Rogerson WP (1997)Intertemporal Cost Allocation and Managerial Investment
Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
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Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
Russ Ray (2001)Economic Value Added Theory Evidence A Missing Link Business
Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
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Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
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Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
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Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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serve
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Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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102
PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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TABLE OF CONTENTS (COUNTINED)
Page
Discussion helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 65 Limitations of this study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 Suggestions for further study helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 68 BIBLIOGRAPHY 71
APPENDICES 85
A Market Capital from 2003-2008 on SET 86 B Company Profile 87 C Statistics Analysis Resultshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 92
BIOGRAPHY 105
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xii
LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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6
000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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d
CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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14
managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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18
earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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22
the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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23
2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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35
turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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36
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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54
Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
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Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Akiston H Hamburg J amp Ittner C (1997) Linking quality to profits Milwaukee WI
SQC Quality Press Armstrong M and Baron A (1998) Performance Management The New Realities
Institute of Personnel and Development London Andrew C Worthington and Tracey West (2001) Economic Value-Addedreg A Review of
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102
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RidgeIllinois Brigham Eugene FLouis C Gapenski and Michael C Ehrhardt (1999) Financial
Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
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httpwwwbjgzwgovcngzjcmzwz152200803170110htm Clinton BD amp Chen S (1998) Do New Performance Measures Measure
Up Management Accounting 80 4 38ndash44 Creelman J (1998) Building and implementing a Balanced Scorecard International
best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
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Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
Creation in an Emerging Market The Case of Saudi ArabiaInternational Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen (Sep1998) Economic Value Added as a management tool Helsiniki
School of Economics and Business Administration Retrieved January 2008 from httpwwwevanomicscomevastudyshtml
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
Theory of Investment The American Economic Review
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Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
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Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
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Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
zur Prognose der Peformance europscher Aktien Arbeitsberichte der Hochschule fur Bankwirtschaft Nr 27 Hochschule fur Bankwirtschaft ndash Private Fachhochschule der Bankakademie (ed) Dezember 2000 FrankfurtMain
Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1996) Evareg An integrated
financial management system European Financial Management Joel Stern G Bennett Stewart III and Donald H Chew Jr (1998) The EVA Financial
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Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
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Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Joseph Chang (July 1997) Spreading EVA Chemical Market Report Kaplan RS amp Norton DP (1996) The Balance Scorecard Translating Strategy into
Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
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Business Processes internet document accessed 05022001 httpwwwpeterkeencomemgbp007htm
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Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
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Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
Lin Ciang-Liang and Kuan Yuh-Lih (2007) An Association Study of Economic Value Added and Residual Income with Firm Value Journal of Risk Management Vol9 No1 March 2007pp 27-44
Lin Wen-Ren (2005) Evaluate Performance Measures in Taiwan Tourist Industry MA in
Finance Department National Kaohsiung Technology University
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Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
EMBA program Industrial economics National Central University Taiwan Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Martin JD and Petty JW (2000) Value-based management the corporate response
to the shareholder revolution Boston Massachusets Harward Business School Press
Mehdi Sheikholeslami (2001) EVA MVA and CEO Compensation American Business
Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
Michael Rago(2008) An Analysis of Economic Value Added MBA program Liberty University from httpdigitalcommonslibertyeducgiviewcontentcgiarticle=1031ampcontext=honors
Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of Applied Corporate Finance 9 no1 Spring 104-115
Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
ลขสท
ธ มหาว
ทยาลย
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right
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serve
d
80
Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
Paul A Dierks and Ajay Patel (Nov1997) What is EVA and How Can It Help Your
Company Management Accounting 79 no5 52 PC Brewer G Chandra and CA Hock (Spring 1999) Economic value added (EVAreg)
its uses and limitations Society for the advancement of management (SAM) Adv Manage J pp 4ndash11
Pretorius JL (1997) Economic value added as an alternative method of valuation
Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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ธ มหาว
ทยาลย
หอการ
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ย
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81
Rawinun Ekaluksananon (2003) Study of relationship between economic value added and shareholder value of companies listed in SET MBA program Chulalongkorn University
Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Rennie P (1997) Finding the Best and the Worst Wealth Creators Business Review
Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
and MVA Are They Reliable Indicators of Future Stock Performance Journal of Investing Date posted December 19 2005 last revised December 19 2005
Rober T Kleiman (1999) Some New Evidence on EVA Companies Journal of Applied
Corporate Finance 12 no2 (Summer 1999)90-91 Rogerson WP (1997)Intertemporal Cost Allocation and Managerial Investment
Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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d
82
Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
Russ Ray (2001)Economic Value Added Theory Evidence A Missing Link Business
Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
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ธ มหาว
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d
83
Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
Tokokeizai Magazine (2000)Top 1000 Japanese Corporation in EVA and MVA from httptwtrendmicrocomtwaboutnewsprarticle20070919092534html
Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
ลขสท
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84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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d
APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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89
privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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91
international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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92
the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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94
Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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95
Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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serve
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11
Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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xii
LIST OF ABBREVIATION
Capital asset pricing model CAPM
Cash flow return on investment CFROI
Discounted cash flow DCF
Dividends per share DPS
Earnings before interest and taxes EBIT
EBIT plus depreciation and amortization EBITDA
Earnings per share EPS
Economic Value Added EVA
Free cash flow FCF
Market Value Added MVA
Net income NI
Net operation profit after tax NOPAT
Profit after tax PAT
Residual income RI
Return on total assets ROA
Return on common equity ROE
Return on investment ROI
Return on invested capital ROIC
Return on net worth RONW
Return on sales ROS
Weighted average cost of capital WACC
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xiv
LIST OF TABLES Table Page 21 Accounting items under GAAP and adjustments in EVA method
Young and OrsquoByrne (2001)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 25
22 The relationship between EVA and other financial performance measures
Stern (1993)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 34
23 The relationship between EVA and other financial performance measures
Uyemura Kantor and Pettit (1996)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 35
32 A Regular Balance Sheet vs The EVA Balance Sheet helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 48
41 Descriptive statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphelliphellip 53
42 Comparison of average MVA and EVA helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 54
43 Correlation statistics matrix of this study (2006Q4-2008Q3)helliphelliphelliphelliphelliphelliphelliphelliphellip 55
44 Summary of regression matrix between EVA and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 56
45 Selected coefficients for total sample EGCO RATCH and PTTEPhelliphelliphelliphelliphelliphellip 57
46 Summary of regression matrix between traditional accounting measures
and MVAhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 58
47 Summary of regression matrix MVA depends on all independent variableshelliphelliphelliphellip 59
48 Summary of regression matrix between all variables for each companyhelliphelliphelliphellip 60
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LIST OF FIGURES Figure Page 11 Market Capitalization on SET (2003-2008) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 6
21 A typical bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 28
22 The EVA bonus plan helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 29
31 The conceptual frameworkhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip 44
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CHAPTER 1
INTRODUCTION
11 Introduction In the 1980rsquos while investors started to express interest in stock market the publicly
listed companies had to pursue the creation of value for their shareholders as the most
significant goal Many different interpretations of shareholder-value seem to wildly exist
throughout the public discussion and the press Although chairmen of big corporations have
taken up the talk of aiming at an increase of shareholder value they have not made exactly
clear how they will attempt to reach this goal or how success on this step shall be
measured (Young and OrsquoByrne 2001) Thus the rapid changes have led to a general
dissatisfaction with traditional performance measures (Needly et al 1999) new
mechanisms for measuring value have been created For example John Kay (1993)
developed the concept of Valued Added which measures the different between the
comprehensively accounted valued of the input and the output of a firm And one of the
most popular mechanisms is Economic Value Added (EVA) which increases transparency
for investors and managers developed and trademarked by a US-based consulting firm
called Stern Stewart amp Co
Stern Stewart amp Co launched the concept in order to motivate managers and other
employees in 1989 (Stern and Shiely 2001) Stewart revised through numbers of
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accounting adjustments and relabeled EVA in 2001 (Anderson et al 2005) But it
widespread as the financial management and incentive compensation system began with
Fortune Magazine proclaimed EVA asrdquo todayrsquos hottest financial idea and getting hotterrdquordquo
The real key to creating wealthrdquo (September 1993) ldquoA new Way to Find Bargainsrdquo
(December 1996) ldquoAmericarsquos greatest wealth creatorsrdquo(November1997) and even today ldquoA
new way to value the marketrdquo (February2008) the management guru Peter F Drucker
(1993) described it as ldquoa vital measure of total factor productivityrdquo in Harvard Business
Review
Originally in the United States EVA has been ldquoliterally adopted by hundreds of the
leading firms such as Coca-Cola Eli Lilly Quaker Oats AT amp T and the Postal Service in
the United Statesrdquo (Biddle et al 1998) and also by investment banks like Credit Suisse
First Boston or Goldman Sachs have supplements traditional valuation methods with EVA
The CEO of Coca-Cola Roberto Goizuera believed that adopted EVA in turning the firm
become the number one Market Value Added Company when itrsquos stock price increased
form $3 to over $60 in the early 1980s James Meenan the CFO of AT amp T long-term
business declared that EVA has an almost perfect correlation with stock price tracked back
the calculation to 1984 from 1994 and used it to be the lead indicator including ldquopeople and
customer value addedrdquo of their performance measurement
EVA has been world wildly promoted in UK Australia Canada Brazil Germany
Mexico Turkey and France that it has adopted by several international firms (Stern
Steward 1999) For example the ABSA Banking Group in South Africa
(Weldeghiorgis 2004) the ANZ Banking Group Fletcher Challenge Limited James Hardie
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Industries and the Wrighton Group in Australia have implemented EVA for many years
(Rennie1997) Furthermore the big European conglomerated such as Siemens has put
EVA to completely change the company since introduced there in 1998 and lately more
spreading to Latin American and Asia (Young and OrsquoByrne 2001)
In Asia the Japanrsquos financial magazine Toyokeizai mentioned that EVA is not only
a financial tool but also a mind-set creator for the managers and employees Many
international firms were actively to implement it such as Kao Corporation Asahi Kasei Kirin
BeerSonyhellipetc(Toyokeizai magazine 2000) In China state-owned assets supervision
and administration commission of Peoplersquos Government announced in the upcoming 2010
EVA will be one of the evaluation standards for senior managers (China Business News
2008)
The concept of EVA is definitely not new EVA is a modified computation of residual
income with a series of accounting adjustments to how one calculates income and capital
EVA is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which
means the cost of capital by Stewart in an enterprise or projects (Maumlkelaumlinen and Roztocki
1998) In addition Stewart (1991) claimed that EVA is not only the financial measure
which comes closer than any other to capturing the true economic profit of an enterprise
but also the performance measure most directly linked to the creation of shareholder wealth
over time Stewart (1994) also stated that ldquoEVA stands well out from the crowed as the
single best measure of wealth creation on a contemporaneous basis and is almost 50
better than its closer accounting-based competitors in explaining changed in shareholders
wealthrdquo
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EVA basically stands for appeal to common sense although underlying application
can be complex But it is the way to show what ldquovaluerdquo was made from what capital was
used By using EVA is to help the firm to achieve more with as little capital as necessary
which points managers and firms toward efficiency It transforms employees into
entrepreneurs via incentive complementation and just simplest application needs commonly
financial statements
Managers can also used EVA as a diagnostic likely tool to show which one of the
departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp
Roztocki 1998) In short the EVA management system covers all managerial decisions
including strategic planning capital allocating setting day-to-day operating decisions
There is no absolute perfect measurement tool EVA also has its critics In fact EVA
is not constrained by the Generally Accepted Accounted Principle (or GAAP) Some experts
suggested that EVA is not the best choice for all companies which is not universal suitable
since it has no official standards about using the metric (Lars amp Clas 2001) OrsquoHanlon and
Peasnell (1966) stated that EVA provides a valuable transformation from wrong accounting
numbers into correct estimates of value But there is no theory to guide how to select
accounting adjustment of the most relevant items which depend on the financial structure
and industrial nature (Anderson et al 2005)
Brewer (1999) mentioned that ldquosize differencesrdquo across plants or division will effects
the EVA It is based on financial accounting method it is possible manipulated by
managers EVA provides immediate results which diminish innovation moreover it offers no
solutions in much the same way as historical financial statements do
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5
12 Statement of Problems Energy is one of the key factors to several economic movements Without it the
worldrsquos entire industrialized infrastructure would collapse (Liseadiratanakul and Uarkarn
2008) Moreover the opportunity that people would stop using oil natural gas or other
substitutions in next 10 years will not too much Therefore energy business would not be
disappeared (Vibul Perngprasert 2006)
As Asian economies bloomed their energy consumption grew by similar proportions
it will be the worldrsquos largest consumer of primary energy in the near year of 2010 (R
Manning 2000) In South Asia Thailand is considered to be the biggest consumer
Recently the total energy expenditure amounted closely to 17 of the GDP
In the past security in energy sector were mostly affected the performance of Thai
stock market Last year the resource sector including energy and mining industries had
also the highest capital which is 35 of all equity market The director of AWR Lloyd
(mining energy and metals advisory) Alexander Wood (2008) pointed out that by the year-
end of 2007 after generating total shareholder returns of around 70 the listed energy
sector had a total market capitalization around 25 trillion baht which is approximately 40
of the total equity capitalization of the entire Thai stock market Market capital data on SET
from 2003 to 2008 are compared shown as Figure 11 (Market capital data on SET from
2003 to 2008 is attached in Appendix A)
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6
000
50000000
100000000
150000000
200000000
250000000
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
2008 2007 2006 2005 2004 2003
Period
Mill
ion
Baht
AgroConsumpFincialIndusPropconResourcServiceTech
Figure 11 Market Capitalizations on SET (2003-2008)
Source SET index
An emerging literature of analyze whether EVA is highly associated with stock
returns than traditional performance measures has addressed the empirical issue Tully
(1993) claimed that EVA has significant relationship with stock price returns and both are
remarkable tendency Some even claimed traditional accounting measures were inadequate
measures of a firmrsquos performance
So far there are few EVA relevant studies in Thailand covering the energy sector
Consequently this is an opportunity to begin a research in this area
13 Objectives of the Study The purpose of this study is to develop and test EVA as the performance measure in
the decision-making of investment by the management and in evaluation the future
performance of stock by the investor like Stern Stewart amp Co claimed The objectives of
this research are as follow
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7
1 To investigate if EVA can be suitable for applying to the Thai energy sector
2 Moreover to investigate if EVA can better affect the operational performance of
Thai energy sector than the traditional performance index (including EPS ROA and ROE)
in explaining Market Value Added( MVA) thereby stock returns
14 Expected Benefits 1 A better understanding of calculating EVA and MVA
2 International firms can take the finding of this study as a reference compared
between innovation measure - EVA and traditional performance measures
3 To make more investors sophisticate about the comprehension of EVA and MVA
as a practical tool of stock market investing
15 Scope and limitations
The sample firms are listed on the Stock Exchange of Thailand (SET) and are
gathered the quarterly financial reports in twenty quarters within the same organization and
cross the firms within the energy sector Assuming that the equity markets are efficient
eight companies of Thai energy sector is selected and completely qualified would be
employed in the empirical study
However due to the scope of the problem this research is obliged to make
limitations
16 Operation Definitions
Capital Asset Pricing Model (CAPM) - A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities
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d
8
Net Operating Profit After Tax (NOPAT) - The profit a company would generate if it had no debt and held only operating asset
Earnings before Interest and Taxes (EBIT) - When comparing companyrsquos operating performances it is essential to focus on their earnings before deducing taxes and interest payments And it is often referred to as operation income
Earning per share (EPS) - It is a bottom-line to denote that of all items on the income statement EPS shows that a companys profit allocated to each outstanding share of common stock EPS serves as an indicator of a companys profitability
Weighted Average Cost of Capital (WACC) ndash A weighted average of the component costs of debt preferred stock and common equity
Invested Capital - represents the total cash investment that shareholders and debt holders have made in a company
Economic Value Added (EVA) - The EVA is a registered trademark by its developer Stern Stewart amp Co that is an estimate of true economic profit after making corrective adjustments to GAAP accounting EVA can be measured as Net Operating Profit after Taxes (NOPAT) less the cost of capital
Market Value Added (MVA) ndash A measure to directly reflect the creation of shareholder value developed by Stern Stewart amp Co It shows the difference between the market value of a firmrsquos equity and the book value as shown on the balance sheet with market value found by multiplying the stock price by the number of shares outstanding Return on Total Assets (ROA) ndash The ratio of net income to total assets after interest and taxes Return in Common Equity (ROE) ndash The ratio of a fiscal years net income to common equity measures the rate of return on common stockholdersrsquo investment
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d
9
16 Organization of the study This research is consisted of five chapters
Chapter 1 Introduction
This chapter serves as the general introduction to the whole study including
statement of problem objective expected benefits scope and operational definitions
Chapter 2 Literature Review
In this chapter the attention is focused first on the Value-Based Management
second on the Market Value Added and the origins of Economic Value Added and its
metric adjustments and components Finally relevant literature will be discussed
Chapter 3 Research Methodology
This chapter explicitly states the research population the conceptual framework the
data collection and the research models used for data analysis
Chapter 4 Result and Analysis
In this chapter the analysis results of these sample firms in Thai energy sector by
using descriptive person correlation and regression methods will be showed
Chapter 5 Conclusion Discussion and Suggestion
This chapter concludes with a summary of findings discussions limitations of the
study and suggestions for future research
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serve
d
CHAPTER 2
LITERATURE REVIEW This chapter is composed of the parts namely a discussion on the theories and
relative researches of the topics on the value based measurements and traditional
performance measurements as well as discussed on the conceptual framework later There
are numerous relative researches in this field the relationship between both traditional
performance measures and value-based management will be discussed Therefore this
chapter is arranged as follows
21 Traditional Performance Measures
22 Value-Based Management
23 Market Value Added
24 From MVA to EVA
25 Economic Value Added
251 The Originsndash Residual Income
252 The EVA Metric
253 The Elements of EVA
254 Accounting Adjustments
255 Advantages and Disadvantages
26 Related Research
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11
21 Traditional Performance Measures
There were some dramatically changes in the late 1970rsquos and early 1980rsquos such as
free-floating exchange rates in currency market OPEC oil crisis the end of fixed brokerage
commissions in the United States Additionally it made a growing climate of deregulation to
affect many sectors of economy and the beginning of a world wild privatization In the
1980rsquos the booming economic expended with the accessibility of computing technology
Stock exchange thirsted for promoting the interest to local firms in attractive global market
by lifting restrictions on foreign brokers with adopting advanced trading system (Young and
OByrne 2001) Investors started to possess toward stock market with surplus income than
before Neely et al (1999) stated that this rapid change environment has led to a general
dissatisfaction with traditional performance measurement systems since managers
shareholders and other interested parties used to focus on those
Among standard accounting magnitudes including EPS ROI ROE ROA and other
efficiency ratios under the Generally Accepted Accounting Procedures (or GAAP) but none
of them provides a direct answer to the most fundamental question about the success of
the exclusives Does the shareholderrsquos investment increase the value and if so by how
much (Dennis G Uyrmura 1996)
Merton Miller and Franco Modigliani shattered EPS and drive share price as bottom-
line profits from accounting and finance in the late fifty (Stern 2008) Ehrbar (1998) claimed
that any company should even abandon EPS when pursuit a higher market value EPS
seems to be measured the stock market but it does not consider about what investors may
care about which are First investors would like to know the cash occurred and the risk
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12
incurred in its firms second it is easy to interfered and destroyed by many decisions not to
investorsrsquo advantage Maumlkelaumlinen (1998) explained why EPS can not be totally acceptable
for shareholdersrsquo perspectives Because the way to raise EPS is simply add more equity
into operations until return earned are positive or just encouraging investors by saving
taxes for the firms
Keen(2001) also interpret that EPS can not show the cost of capital that firms will
destroy value by beginning unprofitable investments as well Although rates of return
basically are over the EPS and stimulate managers an efficient use of assets they still are
unclear about defining profit and assets Therefore maximizing returns can not be the
reasonable goal for managers in ways of only providing additional information without being
a target Moreover OrsquoHanlon and Peasnell (1996) found that EPS encourage managersrsquo
short-sighted behavior and make them to compromise the financial strengths of their
companies Managers who believe in pursuit of growing EPS are in reality taking the wrong
way to the right target of stock price control (Stewart 1991)
Stephens and Bratunek (1997) discovered that EPS ROE and earning growth can all
be alternated by changing firmrsquos accounting methods or the capital structure of the firm
Stewart (1999) also noted that when trying to determine which products or customer is
profitable the traditional approach could be very misleading Therefore the traditional
financial measures may have not kept up with the pace of change
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22 Value-Based Management Based on traditional business models incentive both encourage rampant short-term
vision of managers and lead to other forms of dysfunctional behaviors This accounting
system under pricing of capital has also driven broad capital misallocation and
mismanagement Many managers recognized this problem Consequentially in the equity
boom of the eighties many American companies are enthusiastic about the creation of
ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998
Stern Stewart 2000)
Petty and Martin (2001) stated that value creation involves much more than just
monitoring performance but it is where managers are actively engaged in the process of
identifying good investment opportunities and taking steps to capture their value potential
Joseph Chang (1997) declared that creating the shareholder value is common among
corporate management and the investment community during these days Bottger (1999)
stated that basic finance and microeconomic theory indicates that maximize shareholderrsquos
wealth should be any firmrsquos primary financial instruction
Maximizing shareholder value is the corporate strategy of the value-based
management In theory value-based management includes an alignment of corporate
strategy management compensation with detailed internal control and reward systems
involve all employees to act like shareholders to make decisions that maximize value A
comprehensive value-based management system can expend all levels of the corporation
and have an impact on all employees Value-based management emphasizes that
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managers should focus on valuable decision and policy instant of market share or company
size (Knight 1998 Stern 2000)
Numerous consulting firms have developed value-based management metrics which
increase transparency for investors and managers to help corporations to implement their
performance Some popular mechanisms are Shareholder Value Added (SVA) developed
in Rapaport of the LEKAlcar (1986) and Economic Value Added developed and
trademarked by Stern Stewart amp Co (1989) are the two most well-known ones Market
Value Added which is also developed by Stern Stewart amp Co considered as the most
important of all value-based metrics However there exist many challengers as described in
Black Wright and Backman (2001) Cash Value Analysis (CVA) developed by Ottoson and
Weissenrieder (1996) and Cash Flow Return on Investment (CFROI) developed by Boston
Consulting Group (Madden 1999) are two offering serious alternatives to the different
versions of EVA (Ryan and Trahan 1999)
Athanassakos (2007) compared with some popular value-base management metrics
which are wildly used in Canada such as EVA the discounted cash flow (DCF) the cash
flow return on investment (CFROI) the return on invested capital (ROIC) A two pages
survey was received by CEOs of the 288 samples largest publicly-owned Canadian
companies And those companies who use EVA had a better stock price performance than
those who not use there in the 1990s similar with the research in USA by Ryan and Rrahan
(1999)
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23 Market Value Added (MVA) An accepted financial axiom is that shareholder value of the market value of a firm
(including equity and debt) has expressed by its share price But Stern and Stewart
suggested a new measure to directly reflect the creation of shareholder value instead of
simply maximizing market value as it does not concern about the money that investors
have brought up (Wahler 2001) To make up for this MVA clearly shows the difference
between current market value of all capital and total capital supplied by creditors and
shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003) In
short it shows that the difference between what they put in and what they can take out
Under the condition of that the former exceeds the latter have the company mangers truly
created value for the owners (Stern and Chew 2003 Hawawini et al 2003 Thomas and
Rima 2008)
Assuming that market and book value of debt are equal the equation for computing
MVA can be illustrated as follows
Market Value Added =Market Value of Equity ndash Book Value of Equity = Market Price x Common share ndash Book Value of Equity The market value of equity can be recognized by the current valuation of stock
market multiply by the number of share outstanding by the current share price (Heidorn
Klein and Siebrecht 2001 Wet 2005)
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Maumlkelaumlinen (1998) interpreted that the book value of equity indicates the entire capital
dedicated to the corporation by its owners includes equity equivalents special reserves
retained earnings and provisions In a sense equity can be traced from subtracting both
interest and non-interest bearing debt form total assets on the balance sheet
In short a positive MVA symbols the creation of wealth value on the other hand a
negative MVA can be understood as destruction of value Thus managers devote
themselves to maximize the wealth of shareholders by this spread of market value over the
book value of equity defined by MVA (Ross 1997 Brigham Gapenski and Ehrhardt 1988
Russ Ray 2001)
Dierks and Patel (1997) declared that ldquoMVA is the most useful indicator of corporate
success in enriching shareholdersrdquo On the contrary Ferguson et al (2006) stated that
while the adjusted MVA variable may be a weak alternative as an indicator of future stock
performance Fama-French Model has succeed in representing the stock returnsrsquo
components
24 From MVA to EVA
Studies have shown that compared to other accounting measures MVA has by far
the best correlation with EVA Although compare to any one between EVA and firm value
the link exists between EVA and MVA is more complicated (Stern 1993 Grant 1997 Hall
1998 Gates 2000 Kramer and Peters 2001 Hatfield 2002)
Assuming efficient capital markets MVA is equal the sum of all expectation of future
periodic returns more than the cost of capital discounted to current date Thus that is the
present value of all return addition earnings for investors As long as managers maximize
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current MVA as a goal they are doing excess return is also being maximized When
managers and decision makers expect to yield more valuable stream of future EVA
numbers from invest or adopt strategies the result is simultaneously increase in MVA and
excess return (Stewart 1991 Weston and Copeland 1992 Brealy and Myers 2000 Young
and OrsquoByrn 2001) It can be shown as
MVA = Present Value of Future EVAs
However even thought the EVA is increasing the actual EVA might be smaller than
expected EVA if that increase is less than expected (Damodarn 2002)
25 Economic Value Added
251 The Originsndash Residual Income
The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity
Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting
earnings to reflect the opportunity cost of capital since the unadjusted measure cam be a
misleading indicator of performance in both practical and theory Later Marshall stated that
ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo
As early as 1920rsquos General Motors applied this concept and General Electric labeled
it as ldquoresidual incomerdquo to measure their decentralized divisions performance in the 1950rsquos
(Stewart 1994) Then David Solomon (1965) suggested that this quantify ldquoeconomic
profitsrsquo measurement of wealth creation can be ldquothe diffidence between two quantities net
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18
earnings and the cost of capitalrdquo This financial measure known as lsquoresidual incomersquo that is
defined in terms of after-tax operating profits less a change for invested capital reflects
firms weighted average cost of capital (WACC) Anthony (1973) even suggested that use
lsquoresidual incomersquo as a financial performance external measure
Unfortunately residual income also has drawbacks The first problem relates to
inequalities across a firmrsquos divisions in current performance levels Specifically if a firm
pays divisional managers bonuses based on the level of its residual income earned by the
division then managers in divisions that are currently experiencing negative or very low
residual income will receive little or no bonus whereas managers in divisions that earn large
residual incomes will receive very large bonuses that might cause myopic behavior
Secondly if company treats investment income as sunk cost the quality of decision-making
of investing cost still have been improvement (OrsquoHanlon and Peasnell 1998)
Economists have been familiar with the lsquoresidual incomersquo framework for years but in
the other hand businesses have only recently started to switch from managing for earnings
to managing for seeking value (Stern Stewart amp Co 1989) EVAreg has facilitated this
process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual
incomersquo- the value that is left over after a companyrsquos stockholders have been adequately
compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew
1995)
252 The EVA Metric As a staring point developer and promoter US-based consultants Stern Stewart amp
Co argued that ldquoearnings earnings per share and earning growth are misleading
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measures of corporation performance Earnings are diminished by bookkeeping entries that
have nothing to do with recurring cash flow and are charged with such value- building
capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation
value The best practical periodic performance measure is economic value added (EVA)rdquo
(Stewart 1991) Then wildly adoption as an internal and external financial performance
measure and incentive compensation system began with Fortune which announced EVA
asrdquo todayrsquos hottest financial ideardquo(1993) At the same time Peter F Drucker in the Harvard
Business Review advocated EVA as a raising popularity expressed the demands of the
information age for ldquoa vital measure of total factor productivityrdquo (Stern Stewart and
Chew1995)
The operational definition of EVA from the accounting perspective as the difference
between the firmrsquos net operating profit after tax (NOPAT) and its weighted-average dollar
cost of capital (WACC) As a result EVA shows the crucial message that it differs from
traditional accounting measures of corporate profit including earnings before interest and
taxes (EBIT) EBIT plus depreciation and amortization (EBITDA) net income and even
NOPAT because it fully accounts for the firmrsquos overall capital costs (Stern Stewart amp
Co1990) There are several different versions of the EVA equation which are based on the
same principles of EVA provided by Stewart (1991) His equation can be outlines above
EVA capital charge formula = NOPAT- WACC x Invest Capital EVA value spread formula = (ROIC - WACC) x Total Invested Capital Where
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NOPAT= the Net Operating Profit after Taxes WACC= the Weighted Average Cost of Capital ROIC= the Return in Invested Capital Both equations can help managers and decision makers to discern which projects
will be beneficial to the firm through showing which ones will add to the value of the
corporation (Stewart 1991) Because it only gleans the pertinent financial data and just like
Stewart saysrdquo accounting entries that do not affect cash do not affect valuerdquo since cash
and value which means to increasing firmrsquos worth are major factors of successful
businesses ( Makelainen amp Roztocki 1998) Therefore if any project that do not increase
firmrsquos worth are not used the effect that it has on accounting figures or earnings such as
EPS will be regardless Anyhow those projects that improve value are conditionally
adopted and furthered This is the simple concept of only doing what would financially
benefit the firm and not doing what hurts the firmrsquos financial health (Stewart 1991)
Mehdi (2001) indicated that a positive EVA number shows that the form create value
to shareholders since the post-tax rate of return on invested capital exceed the weighted
average cost of capital A negative EVA implies the firm destroy market valued by invested
in capital projects that fall short of returns required by both debt and stockholders
According to Tullyrsquos research (1993) there are three ways to increase EVA First
firms can improve operation performance to earn more profit on existing projects Second
firms can use less capital to achieve the same target return Finally firms can invest new
high-return projects which are projects that make sure to earn more than the total cost of
capital Only when the value created cannot without the cost of capital invested is of be
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relative to increase shareholder value EVA like this residual income left after deducting
opportunity costs from operating earnings shown in equation (Weber Koch 2001)
253 The Elements of EVA (1) Net operating profit after tax (NOPAT)
Stewart defined the NOPAT as ldquoSales ndash operating expenses ndash taxesrdquo if it had no
debt and fled no financial assets This is one of the easiest accounting data adjustments
taken from financial statements (Maumlkelaumlinen 1998) Brigham Gapenski and Ehrhardt
(1999) are defined as follow
NOPAT = EBIT (1 - Tax Rate) It means profits minus operating cash outflows and taxes Earning before Interest Tax
(EBIT) emphasizes the efficient measurement of not yet misrepresented causing by
separating financial structure as the basis of the following calculations In any way
accounting adjustments need to be made to reflect the investor side since the financial data
used to be bias toward the lend side For illustrate RampD advertising expense and
employee training fee should added back to EBIT instead of operation expense (Stewart
and Chew 1995) and for more details will be discussed later
(2) The Return in Invested Capital (ROIC) Managers usually glance at the ROIC as a percentage number to express NOPAT
relatives to the Invested Capital providing a message about performance (Heidorn Klein
and Siebrecht 2001) Stewart suggested using return on average net assets to considerate
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the changes in net assets during each period Maumlkelaumlinen (1998) then indicated that it is
important to except returns earned thought the year in the capital derived from the end-of-
period balance sheet
(3) WACC is use for measuring Cost of Capital Stewart defined the Cost of Capital as ldquothe minimum acceptable return on
investmenthellipan invisible dividing line between good and bad corporate performancerdquo This
is more complicated than simply defined as what one must pay for the funds that one uses
In fact this is important because if the corporate returns do not meet the requirements of
investors they will choose not to continue supporting the firm (Maumlkelaumlinen amp Roztocki
1998) It makes sense that cost of capital is like a break-even point for a firm if a firm does
not have sufficient returns to cover its cost of capital it cannot pay investors for what it has
borrowed likely showing the incompetence of management However to calculate the cost
of capital is not so easy to do There are four components of the cost of capital which are
the cost of ldquobusiness riskrdquo ldquoborrowingrdquo ldquoequityrdquo and ldquoWACCrdquo and ldquothe blended cost of the
firmrsquos debt and equityrdquo (Stewart 1991)
Brealey et al (1999) are aware that the opportunity cost of all capital employed in a
firm of business unit for investments of similar risk can be estimated through the WACC
defined as
WACC = Wd x Kd (1-T) + We x Ks Wd is the cost of debt which can be calculated by two ways one is using the risk free
of return plus a particular risk premium got from the ranking of the firm (Weber amp Koch
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23
2000) And the other one we can use the way suggested by Stewart which is directly
selecting long-term bonds of companies with a similar risk-profile The average yields of
those bonds should be the pre-tax cost of debt The cost of debt can also be attained by
cost of marginal debt and still needs to be adjusted for tax deduction of interest payments
by multiplying the interest rate by (1-T) T being the tax rate of the company (Brigham
Gapenski amp Ehrhadrd 1999)
The common stock offers the rights to a companyrsquos earning Since these are unstable
stockholders will demand a required rate of return to accept the risks involved by the
company or business unit instead of promising a fixed payment The required rate can be
defined as the cost of common equity Ks is calculated by the Capital Asset Pricing Model
(4) Invested Capital Invested capital has two approaches to calculate as follows (Young amp OrsquoByrne
2001) The important point is that the measure of capital at the companywide level should
be the same
Invested capital operating approach = excess cash + working capital requirement
(WCR) + fixed assets
Where
WCR= (inventories+ receivables + other current assets + operation cash) ndash (accounts
payable+ accrued expenses + advances from customers)
Invested capital financing approach = short-term debt + long-term debt + other long-
term liabilities + shareholdersrsquo equity
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254 Accounting Adjustments To calculate EVA itself Stern Stewart amp Co suggested a series of adjustments to
GAAP-based numbers Consisting more that 150 possible adjustments indicated by Young
and OrsquoBryne (2001) these are based on both of empirical and theoretical concerns They
further stated that ten to twelve accounting adjustments were most general to published
accounts Now the numbers has declined to five or fewer and in some cases there is no
adjustment is made The filter criteria applied to determine the necessary adjustments
based on Stewartrsquos suggestions (1991) as follow
1 The adjustment should be significant as a material to measure performance
2 It should impact future decisions which mean to drive value increasing not to cause
distortion
3 It should be ease of understanding for all operating people
4 The data of the adjustment should be accessible and available for reports
The remaining modifications suggested by Young and OrsquoByrne (2001) they also
mentioned that the adjustments should depend on what the company thinks is best The
highlight of most important of EVA accounting adjustments in Table 21 as follows
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Table 21 Accounting items under GAAP and adjustments in EVA method
Adjustment Items
Under GAAP EVA method Reasons for adjustment
RampD expense
Current expense Not assets
The amortized costs are added to Invested Capital in tangible assets (average is 5 years)
Avoid short-sighted behavior
Provisions for warranties and bad debts
As the accrual basis of the account
Capitalized and added to NOPAT
Only actual cash flows should enter into the calculation
Deferred taxed
Assets or liability due to the timing differences
Added in the net deferred tax liability for the year to NOPAT
Not a current cash cost should be ignored
Depreciation Straight-line method
Sink-fund method (Hard to achieve sink-fund method since the difficulty of getting information
Avoid short-sighted behavior and not willing to invest in new equipment
Purchased in Goodwill
Straight-line amortization over a period( Not to exceed 40 years)
Amortized goodwill costs are added back to NOPAT and restored to Invest Capital
Assume it is a non-wasting but non-appreciating asset
LIFO Inventory method
LIFO (Last in first out)
FIFO (First in fist out)
Inventory value can be more close to the market value
Operation leases
Assets but not in record
Added to Invested Capital the present value of future lease payment as of the Balance Sheet date discounted at the companys barrowing rate
More accurate picture of the true indebt ness But it doesnt have a significant effect unless huge amount of operating leases
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Table 21 Accounting items under GAAP and adjustments in EVA method (Continued)
Non-recurring events (such as restructuring charges)
Amortized the charge into expense over a subsequent period
Less from NOPAT and relative assets or liability from Invested Capital
Non-recurring events are not being considered Its necessary investment in the future successes of the business
Source adopted from Young and OrsquoByrne (2001)
The most important potential accounting adjustments have been provided in table21
but ldquofor most companies the assumption of zero adjustments is a logical starting point in
deciding how EVA is to be measuredrdquo (Young and OrsquoByrne 2001) Until now there is no
empirical evidence to show that EVA adjustments convert wrong accounting numbers into
correct estimates of economic value as OrsquoHanlon and Peasnell (1996) claimed
The results of the research by Anderson Bey and Weaver (2005) showed that the
most important adjustments were RampD expense and for LIFO accounting process and no
support for a large of accounting adjustments They calculated over 300 companies in the
Stern Stewart 1000 listing in The Journal of Applied Corporate Finance for the 1988 to 1997
time period and found that these two adjustments can be minimal for ease of use and still
bring fairly accuracy In addition regressions showed that a very strong relationship
between adjusted and unadjusted EVA They claimed that ldquoaccounting adjustments for EVA
are much to do about nothingrdquo
255 Advantages and Disadvantages 1 Advantages
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Despite the relatively comprehension of EVA as the only performance measure to
tie directly to the intrinsic market value of a company (Stewart 1996) there are some
advantages of EVA that company can take benefit from some of them are as follow
(1) Efficient Measurement
Stewart indicated that an indispensable goal of using EVA is to cause the firm to
achieve more with as little capital as necessary which points managers and firms toward
efficiency Efficiency is not the first concern of EVA but it is the way to show what ldquovaluerdquo
was made from what capital was used in other word it judges efficiency (Maumlkelaumlinen 1998
Dillon amp Owers 1997) Money for invest should be in such method that would maximize its
return or at least pay for the cost of using it (Dillon ampOwers 1997) Indeed this is a
fundamental concept of EVA which is to get more for less and that can help managers to
make better investment decision to create long-term value for the company (Roztod amp
Needy 1998 Ballow Persson and Knechtel 2001)
(2) Bonus Design System
Many researchers stated that many managers feel that traditional accounting-based
measurement systems no longer adequately fulfill the need in compensating managers
(Creelman 1998 Kaplan amp Norton 1996 Atkinson et al 1997 Ittner and Larcker1998
Kleiman 1999) In a typical bonus plan shown as Figure 21 it set the performance starting
point of 80 at the target performance below which no bonus is acquired and the limited
expense is at 120 of target As a result the performance measure which creates a limited
bonus zones and may be tie-on business unit results
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Figure21 A typical bonus plan
Source Adopted from Young and OrsquoByrne (2001)
On the other hand a well-designed bonus plan is much practical than to meet yearly
budgets since that would provide a greater incentive for performance (Stewart 1991)
Stewart wisely indicated that a firm bases its managersrsquo incentive on an adjusted
percentage of EVA not just on financial performance from them and suggested that they
should get a portion of the actual value they help to make shown as Figure 22
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Figure22 The EVA bonus plan
Source Adopted from Young and OrsquoByrne (2001)
This method is to directly linkage the flexible compensation and share price which
means do not limit managers to a particular bonus range and view them as the owners to
reduce agency problems To make all managers fully participate in all of their actions
without incurring any more costs that are not or at least covered by the increasing profits
not to hurting the company by increasing its debt without having the new profits pay for it
The firm becomes more efficient and value-enhanced thought bonus compensation to offer
managerrsquos incentive under this system The goal that the managers aim for is to improve in
EVA resulting in the growth of a firmrsquos value ( Shaked amp Leroy 1997 Stewart 1991) Within
ethical standards obviously divisional managers would like to make efforts on maximizing
the long-term profits
(3) Universal suitability
EVA is appropriate for universal is another one benefit Simplest application requires
only two commonly financial statements which are the balance sheet and the income
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30
statement allowing it to be relevant to virtually any company with accurate financial
statements (Maumlkelaumlinen amp Roztocki 1998)
(4) Other Advantages
The principles of EVA are also comparatively simple to understand (Maumlkelaumlinen
1998) Using those principles of EVA such as efficiency increasing wealth can be easily
conveyed to others including employees and gives them a common goal that they can
clearly consequentially contribute to and appreciate (Maumlkelaumlinen amp Roztocki 1998)
Although the theory underlying EVA application can be complex the basic points it stands
for appeal to common sense Managers can also used EVA as a kind of diagnostic tool to
show which department of the firm need more work to increase a firmrsquos value for the next
period (Maumlkelaumlinen amp Roztocki 1998)
Both researches of Pretorius (1997) and Jansen (1998) recommend that EVA as an
investment decision-making measure (Geyer and Liebenberg 2003) Ryu Kyeong-Pyo
(2002) suggested Korean companies to adopt EVA as a motivation tool with well designed
strategies
2 Disadvantages
There is no exception that EVA is not the perfect solution suitable for everyone
Some experts like Chen amp Dodd (1997) found that EVA provides significant information
value meanwhile accounting profit measures also provide significant information Therefore
it should not be discarded in favor of EVA alone Biddle Brown amp Wallace (1997) found
only marginal information content beyond earnings and suggest a greater association of
earnings with returns and firm values than EVA RI or cash flow from operations Chandra
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31
(2001) identifies that EVA although a better measure than EPS PAT and RONW is still not
a perfect measure Brewer et al (1999) recommend using other performance measures
along with EVA such as balanced scorecard system since balanced scorecard can help
managers to identify value drives (Young and OrsquoByrne 2001)
Unlike GAAP standard members EVA has no official standards about using it so
companies may apply the metric differently than others Some experts say that while EVA
seems look simple it can be or become extremely difficult (Shaked amp Leroy 2007) As the
result the major disadvantage is fair similar EVA to compare with other companies
(1) Applicability
As mention before there is a number of competing value-based management to
maximize shareholder value in large and small investment and divestment decisions One
difference among them is how they arrive at cash flow estimates But some suggest that
EVA is not the best choice for all companies which is not universal suitable Moreover it
cannot reflect macroeconomic fluctuations which affect firmsrsquo cash flows as well as market
values For example EVA starts from accounting data for income and makes a large
number of adjustments to arrive at a proxy for cash flows On the other hand Cash Value
Added (CVA) taken actual cash flows as starting point for analysis is more easily adjusted
to take into account and filter performance measures which built on essentially the same
principal as EVA The formula for CVA is ldquooperating cash less the charges for the capital
employed by the unitrdquo (Lars and
Clas 2001)
(2) Differences of Size
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The measurement disadvantage is what Peter Brewer along with his co-authors in an
article entitled Economic Value Added (EVA) Its Uses and Limitations calls the problem of
ldquosize differencesrdquo (Brewer et al 1999) Brewer mentions that ldquolarger plant or division will
tend to have a higher EVA relative to its smaller counterpartsrdquo Because that one can make
the comparison of two companies and find that one company have a higher EVA yet a
lower ROI This means that although one company had more value created used with the
EVA metric it still would not seem to be as efficient at creating wealth as the other since it
did not necessarily make more value with fewer funds
Cooper and Petry (1994) also found similar evidence that large companies are more
support to shareholder value-creating principles than small ones
(3) Correctness
Another possible drawback argued by Brewer (1999) is EVA provides information that
is obvious but offers no solutions in much the same way as historical financial statement
do The reason is that the calculation of EVA depends on the financial statements based on
accounting principles accountants can change factors to some degree to change the
resulting EVA figure One of the examples is shifting the finished ordering time in or out of
an ldquoaccounting periodrdquo to move the revenues recorded in or out and moving expenses in a
similar manner However adjusted EVA metric will take into account such changes has
been noticed
(4) Inability of foresee
Those who believe that EVA and similar metrics prompt managers to make positive
changes for the present time and present benefits without regarding so much the projects
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that provide returns in the future Brewer (1999) also gave different opinion as a
shortsighted approach to what appears to be in his article RampD expenses A manager who
truly sees what is fit for his company will secure both current and future returns yet will
only place a smaller priority on the current returns yearning for secure future for the
company
(5) Not a problem-solve tool
Young and OrsquoByrne (2001) stated that EVA is of course not a strategy Chandra
(2001) identified that given the emphasis of EVA on improving business-unit performance it
does not encourage collaborative relationship between business unit managers Brewer
also mentioned the problem of ldquoresults orientationrdquo It means that EVA is not a very helpful
diagnostic tool to ldquopoint towards the root causes of operational inefficienciesrdquo Therefore he
assumes that EVA will offer little help and guidance toward improving value when it comes
to strategizing about the next term Others believe that the opposite is true and that EVA
can show managers what needs to be altered to increase value for the next fiscal term
(Maumlkelaumlinen amp Roztocki 1998)
26 Related Research
An emerging literature of analyze whether EVA is highly associated with stock
returns has addressed the empirical issue
261 Research in support of EVA as the best driver of MVA
Finegan (1991) extended Stewartrsquos initial analysis of the correlation between the
EVA and MVA to other traditional performance measures such as EPS growth in capital
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ROIC and growth in cash flow The results by using regression method showed that EVA
has superior explanatory power than others
In Sternrsquos research (1993) he stated that EVA is the key operating measure of
corporate performance not those popular accounting measures earnings earnings growth
dividends dividend growth ROE or even cash flow The research showed that the R2 for
the relationship between MVA and various independent variables ranged from 9 for
turnover growth to 50 for EVA The results were based on averages in table 22
Table22 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROE 25 Cash flow growth 22 EPS growth 18 Asset growth 18 Dividend growth 16 Turnover growth 9
Source The research of Stern (1993)
Two scholars Lehn and Makhija (1996) studied how well EVA and MVA related to
share price performance and to determine whether chief executive officer (CEO) turnover
relative with these two measures by using the financial data of the 241 American
corporations on the year of 1987 1988 1992 and 1993 likewise using the correlation and
regression method Six performance measures were computed per company for each of
the four years three accounting rates of return ROA ROE and return on sales (ROS)
share returns (dividends and changes in share price) Companies revealed lower CEO
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35
turnover rates with high EVAs and MVAs Moreover they stated that EVA and MVA as
effective performance measures contain in information about the quality of strategic
decisions and serve as signals of strategic change
OrsquoByrne (1996) linked EVA market value and the expectation of investors He used
nine years of data from 1985 to 1993 for those companies listed in Stern Stewart
Performance 1000 in 1993 to examine the explanatory power of capitalized EVA (EVA
divided by the cost of capital) NOPAT and free cash flows (FCFs) relative to market value
divided by invested capital He stated the changes in EVA explain more variation in long-
term stock returns than changes in earnings It unlike NOPAT or other earnings measures
is systematically linked to the market value as a powerful tool for understanding the
investor expectations built into a companyrsquos current share price
Uyemura Kantor and Pettit (1996) in analysis of 100 largest American commercial
banks listed on Stern Steward amp Co over the period of 1986 to 1996 demonstrated EVA
has a higher correlation with MVA The results have shown in Table 23
Table23 The relationship between EVA and other financial performance measures
Correlation with MVA Level of correlation
(as indicated by Adjusted R2) EVA 50 ROA 40 ROE 10 Net income (amount) 8 EPS 6
Source The research of Uyemura Kantor and Pettit (1996)
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Milunovich and Tsuei (1996) determined EVA has a closely connected with stock
returns in American IT industry over the period from 1990 to 1995 comparing with the
traditional financial performance tool by using regression method EVA is relatively higher
relevance than EPS growth ROE Free cash growth and FCF They point out that EVA
works best as a supplement to other measures when one is evaluating shares and that
EVA sometimes works when others fail
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in
semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA
Furthermore EVA can better reflect operational performance than traditional performance
measures included EPS ROA and ROE by using regression method
Tu Jen-Hong (2002) also found similar results in both high-tech and traditional
industries in Taiwan and claimed that EVA has higher explanatory power of MVA than
traditional performance measures and company size can significantly effect whether EVA
has higher relative than others or not
West and Worthington (2001) examined 110 Australian companies pooled typical and
time-series over the period 1992-1998 whether EVA is more highly associated with stock
returns than more traditional accounting-based measures including earnings net cash flow
and residual income Tested by relative information content shown that reveal returns to be
more closely associated with earnings than others respectively However incremental
information contents tests recommended EVA adds more explanatory power to earnings
than both net cash flow and residual income when considering composed of the EVA
elements
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37
Rawinun (2003) found that EVA is associated with MVA and stated that these thirty
highest market capitalized companies listed on Stock Exchange of Thailand have a superior
relevant than those thirty lowest capitalized ones during the year 2001 to 2002
Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan
Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool
and evaluation stock performance measure They examined over the period from 1998 to
2000 and compared with EPS ROA and ROE The results showed EVA has significant
positive relationship with MVA with the explanatory power at 328
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand
and their empirical result showed that both banks indicate their ability to take cost
advantage and increase base for profit to maximization and value creation for shareholders
But they stated that EVA has superior relationship with market returns in Baclays while
ROA provides more explanatory power for HSBC
262 Criticisms of EVA and MVA
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total
variation in market value than EVA did by using the Stern Stewart 1000 companies for the
period between 1982 and 1992 They also stated there was no clearly evidence to support
EVA is the best internal measure of shareholder value creation and suggested that
compensation system should rather be tied to profits than to EVA
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992
Stern Stewart 1000 database as a starting point and added some supplementary data for
the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized
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EVA return average EVA per share change in standardized EVA and average return on
capital was able to account for more than 26 of the variation in stock returnsrdquo They also
found that residual income in generally yield the same
Biddle et al (1997) stated that net income was significantly more highly associated
with market-adjusted annual share returns than residual income EVA and cash flows from
operations covering a sample of more than 600 companies over the period from 1984 to
1993 EVA is superior to earnings in its association with share returns They actually
reworked some previous research by OrsquoByrne (1996) and found a better correlation
between net income and firm value than with the EVA regression Rogerson (1997) found
similar results
Clinton and Chen (1998) compares share prices and returns on residual cash flow
EVA and other traditional performance measures and suggested that companies should
consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and
EVA He stated that EBEI can have more relative information content and Incremental
information content when both in explaining contemporaneous stock returns and forecasting
future stock returns
Fernandez (2001) found that more than 50 of 582 American companiesrsquo ten years
correlation between the increase in the NOPAT WACC MVA and EVA for each year He
stated that NOPAT has greater correlation than EVA when the increasing of the MVA
Eljelly and Alghurair (2001) studied EVA associated with MVA compared with
traditional performance measures such as EPS cash flow and ROE in Saudi Arabia
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across all sectors They found that EPS is dominating performance measure with respect to
its association with MVA They also recommend that investors in Saudi market should
consider traditional performance measures as primary tool to evaluate firmsrsquo value
Lin Cheng-Wang (2002) examined 35 listed commercial banks over the period from
1997 to 2000 and stated that the accounting performance indicators are more suitable than
EVA for predicting the contemporaneous MVA When taken more financial data with more
periods the current MVA number will be more predictable and accurate Yang Lien-Tse
(2005) found the similar results
Moreover Huang Shu-Fang (2002) claimed that while explaining contemporaneous
MVA of the research of Taiwanrsquos commercial banks EVA has the highest correlation with
MVA over traditional performance measures But when about next period of MVA the
empirical results showed that EPS has the strongest correlation with MVA
Hsu Wen-Chi (2002) stated that although EVA has positive significance in explaining
contemporaneous stock returns itrsquos still lower than its components pooled ndashEBIAT and NI
in both electronic manufacturing companies and other general companies
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using
regression method to find the relationship between EVA and MVA The results showed that
EVA can not reflect current MVA number
Jhvh de Wet (2005) stated that in not support of EVA can better reflect MVA than
traditional accounting indicators such as EPS dividends per share (DPS) ROA and ROE
He analyzed 347 companies listed on the JSE Securities Exchange South Africa for the
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40
ten-year period from 1995 to 2004 The results suggested stronger relationships between
MVA and cash flow from operations
Lin Wen-Ren (2005) studied EVA in explaining MVA compared with EPS ROA and
ROE in Taiwan tourist industry over the period from 1999 to 2004 He stated that all
performance measures have relationship with MVA EVA has positive relationship with MVA
but has lowest explanatory power in market returns than others On the contrary EPS
affects MVA the most Therefore he recommended that EPS is more suitable for Taiwan
tourist industry as a performance measure
Palliam (2006) compared those common accepted financial metrics with EVA users
and non-users He stated that ROI ROE and EPS are superior and much more stable that
EVA and the evidence showed that EVA is kind of invalid unreliable and questionable
The researcher also suggested that EVA can not be a predictor of stock performance or
enhanced shareholder value Because the study found that there is little or even no
relationship between shareholder returns and a firmrsquos EVA Furthermore the study found
minimal evidence of a difference between the market returns of EVA firms compared to
non-EVA firms
Ismail (2006) examined 2252 UK firms for the period 1990 to1997 and the results
were contrary to the claim of Stern Stewart amp Co The evidence supported that EPS are
more associated with stock returns than both EVA and RI similar as findings of Chen and
Dodd (1997 2001) and Biddle et al (1997)
Lin Ciang-Liang and Kuan Yuh-Lih (2007) studied 2529 sample listed companies
on Taiwan Stock Exchange in stock price and returns depend on RI or EVA over the period
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1991 to 2001 They found both RI and EVA have positive relationship with stock price But
RI has superior explanatory power in stock price and returns
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the
period from 2005 to 2007 and found that EVA has more significant correlation with MVA
than EPS ROA and ROE But EPS has stronger explanatory power in explaining stock
returns by using panel data regressions
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CHAPTER 3
RESEARCH METHODOLOGY The chapter contents the presentation of research methodology and how to conduct
the research in order to find out the results whether the relationship between EVA and MVA
closely or EVA can actually better reflect than traditional performance measurements This
chapter is composing as follows
31 Conceptual Framework
32 Research Design
321 Population
322 Data Collection
323 Hypotheses
33 Data Analysis
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31 Conceptual Framework
Having illustrated EVA we may further extend the two closely related questions The
first question concerns those EVA which have unique elements can be applied to Thai
energy sector as help explaining these MVA in the stock market The second question
relates to the dominance of EVA over the conventional accounting performance measures
of EPS ROA and ROE in explaining contemporaneous MVA
Independent Variables
Economic Value Added
Dependent Variables
Market Value Added
Traditional Performance Measures
Earnings per Share Return on Assets Return on Equity
Figure 31 The conceptual framework
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32 Research Design
The research adopt the concept of Uyemura Kantor and Pettit (1996) by using
quantitative method and collecting secondary data by using Shu Nai-Li (2001) according to
objective by definite the research methodology
Base on literature review and main concept of relationship between EVA compared
with traditional measures and MVA which can be divided into 2 parts
- Independent variable EVA EPS ROA ROE
- Dependent variable MVA
321 Population Assuming that the equity markets are semi-strong form efficient the stock returns
reflect all opened information and can be used to compare the information content of these
competing accounting-based performance measurement (Fama and French 2002) The
sample firms chosen in the study should meet these criteria
1 The listed firms have had completed open financial statements and market
transaction data
2 The listed firms did not belong to fully-delivery shares suspended trading shares
and unlisted shares
3 The firmrsquos fiscal year was calendar year which means the end of the fiscal year was
on Dec 31st
Hence there are eight sample listed companies in energy sector on the Stock
Exchange of Thailand (SET) as follows (The company profiles are attached in appendix
A)
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Code Company full name 1BAFS Bangkok Aviation Fuel Services Public Company Limited
2BANPU Banpu Public Company Limited
3EGCO Electricity Generating Public Company Limited
4IRPC IRPC Public Company Limited
5LANNA The Lanna Resources Public Company Limited
6PTT PTT Public Company Limited
7PTTEP PTT Exploration and Production Public Company Limited
8RATCH Ratchaburi Electricity Generating Holding Public Co LTD
322 Data Collection
When collected the data there is a three months lag It is for the shareholders to
make decision on the firmrsquos published financial performance and the react on the stock
market Therefore this research starts from the 2008 Q3 and tracks back to 20 quarters
which is 2003 Q3 Those independent variables in the traditional performance measures
are illustrated by the textbook lsquoEssentials of Financial Managementrsquo (Brigham and Houston
2007)
1 EPS= Net income Common shares outstanding 2 ROA= Net income Average total assets
3 ROE= Net income Average common stockholderrsquos equity
Above all those ratios can be calculated by taken from the companiesrsquo financial
statements on the website wwwsetsmartcom
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4 EVA = NOPAT- WACC Invest Capital (adopted by Stewart 1991)
1 NOPAT = EBIT(1-T)
2 Invested Capital = Working Capital + Total Non-Current Assets Those data can be taken from each firmrsquos financial statements on the website
wwwsetsmartcom
3 WACC = Wd x Kd (1-T) + We x Ks (adopted by Brealey et al 1999)
= R debt (1-T)(DD+E) + R equity (ED+E)
Weighted Return on debt Return on equity Averaged x x Cost of Proportion in debt Proportion in equity
Capital
(1) R debt = Interest Expenselong-term debt is retrieved from the financial
statements published on wwwsetsmartcom
(2) R equity = Cost of equity is calculated by using the Capital Asset Pricing Model
(CAPM) developed by Sharp (1964) Linter (1965) Mossin (1966) and
adopted by the research of Weerakhajornsak (2007) with the
formulation as follows
R = Rf + β x (Rm ndash Rf) Expected Risk free Beta Difference between Return on rate of the expected return
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a security security on market and risk free rate (a) Rf is the daily rate of Thai Government 22 years Bond in research
Period from the Thai bond market association published on
wwwthaibmaorth
(b) Rm is the market daily return on SET wwwsetsmartcom
(c) Rm ndash Rf is the average value of expected return on market and risk free rate
in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression in
which the data of the closing price of SET index from wwwsetsmartcom
and securities in energy sector is to find out market return and return on the
security respectively
Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) 100
Return on the security is calculated as
Ri = ((Closing pricet ndashClosing pricet-1 + Dividendt) Closing Pricet-1)) 100
(3) D is the total liabilities from the balance sheet published on wwwsetsmartcom
(4) E is the total equities from the balance sheet published on wwwsetsmartcom
(5) T is corporate tax rate 30
4 The Accounting Adjustments
To calculate EVA we use the financial statements the potential accounting
adjustments must be made Here notice that the difference from the regular balance sheet
and EVA balance sheet developed from Yong and OrsquoByrne (2001) shown in Table 32
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Table 32 A Regular Balance Sheet vs The EVA Balance Sheet
Regular Balance Sheet
Cash Short-term debt
Receivables Bank overdrafts and short-term loans from financial institutions
Inventories Current portion of long-term liabilities Prepayments Short-term loans from related parties-net
Short-term NIBL Trade accounts and notes payable-net Other current liabilities Long-term debt Fixed Assets Long-term loans to related parties-net
Long-term loans-net of current portion
Other long-term liabilities Shareholders equity NIBL= non-interest-bearing liabilities
The EVA Balance Sheet
Cash Short-term debt
WCR Bank overdrafts and short-term loans from financial institutions
Current portion of long-term liabilities Short-term loans from related parties-net
Long-term debt Long-term loans to related parties-net
Fixed Assets Long-term loans-net of current portion
Other long-term liabilities Shareholders equity WCR= working capital requirement
Source Developed from Yong and OrsquoByrne (2001)
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This research is based on the original idea of EVA concept and developed by Young
and OrsquoByne (2001) The comparison of these two balance sheets clarifies how EVArsquos
capital structure has been defined In the second table it shows an EVA balance sheet
where we deduct the short-term non-interest bearing liabilities from other current assets
from other assets from the balance sheet And it impacts WACC calculation
5 MVA = Market price x Number of common shares - Shareholders equities
This research is adopted the equation provided by Stewart (1991)
323 Hypotheses
A hypothesis needs to define specifics in operational terms by the researcher to
either confirm or disprove it In Zikmundrsquos business research method (2003) stated that a
hypothesis is a statement that can be refuted by empirical data Hausman (1978) proposed
a general approach to test the significance of an estimator versus an alternative The
symbol H0 is assigned to the null hypothesis which is a statement about a status quo and
the H1 is to the alternative which is the opposite if the null hypothesis Moreover if the
finding rejects the null hypothesis it will accept the alternative hypothesis
This research consists of hypotheses as follows
Hypothesis 1
H0 EVA does not affect MVA in Thai energy sector
H1 EVA affects MVA in Thai energy sector
Hypothesis 2
H0 Traditional performance measures (EPS ROA and ROE) do not affect MVA in
Thai energy sector
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H1 Traditional performance measures (EPS ROA and ROE) affect MVA in Thai
energy sector
Hypothesis 3
H0 EVA can not better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
H1 EVA can better reflect MVA thereby stock returns than traditional performance
measures (EPS ROA and ROE)
33 Data Analysis
EVA and traditional performance measures (EPS ROA and ROE) formulations will
be employed to estimate their valuations and also benchmark crossing different period of
time
1 Descriptive Analysis
The researcher employed descriptive method to describe total characteristics of
sample listed companies
2 Correlation Analysis
The researcher employed correlation statistical method to measure the association
between two variables The correlation coefficient can indicate their directions and
covariance
If the value of correlation coefficient is 10 there is a positive linear relationship If it is -
10 there is negative liner relationship Then to find out the proportion of the variance in
MVA explained by EVA or other traditional performance measures the R2 will be
determinate
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3 Regression Analysis
To prove hypothesis 1 the researcher will employ enter method in simply regression
analysis to test EVA can affect MVA or not EVA will affect MVA if significant is less than or
equal to 005
While traditional performance measures are considered as independent variables in
hypothesis 2 multiple regression analysis is to examine whether if EPS ROA ROE affect
MVA
According to hypothesis 3 the study also tries to prove that EVA can better reflect
MVA thereby stock returns than traditional performance measures Both hypotheses 2 and
3 will employ stepwise regression analysis The explanation is the same as the above that
if significant is less than or equal to 005 those independent variables (EVA EPS ROA
and ROE) will affect dependent variable (MVA)
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Chapter 4
Result and Analysis
This chapter focuses on the empirical results by using sample listed firms on SET
index in Thai energy sector Assume the stock market is efficient (semi-strong form) there
are eight companies are employed
The researcher uses descriptive statistics describe the different of each variable by
frequencies distribution such as minimum maximum mean and standard deviation Then the
correlation and regression analysis are used to test the relationship between the dependent
variable (MVA) and independent variables (EPS ROA and EPS)The results generate from
the data analysis is present in five sections as follows (The result of each analysis is
attached in Appendix C)
41 Descriptive Analysis Results
42 Correlation Analysis Results
43 Regression Analysis Results
431 Analyze the innovation measure -EVA
432 Analyze the traditional measures (EPS ROA and ROE)
433 The results of all independent variables
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41 Descriptive Analysis
In this part descriptive analysis transforms the raw data into a form in order to be
easily understood It has been organized and presented in Table 41
Table 41 Descriptive statistics matrix of this study (2006Q4-2008Q3)
n=160
Variable Minimum Maximum Mean SD MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
First of all the highest MVA number is 55304837 million Baht which is lead by PTT
in 2007 Q3 while IRPC has the lowest one of -7414330 million Baht in 2004 Q1 Then
the highest number of EVA comes to PTT in 2008 Q3 with the result of 21786227million
Baht The latest one is -13667042 million Baht which is IRPC in 2007 Q1
For the traditional accounting measures PTTEP gets the highest percentage in 1197
of EPS in 2007 Q1 while IRPC gets the lowest one in -23 in 2008 Q3 In ROA the result
3937 presents the highest percentage in which is PTTEP in 2006 Q2 On the other hand
the result 312 presents the lowest percentage in which is LANNA in 2006 Q4 Finally
the highest ROE goes to IRPC in 2005 Q4 with 10038 and on the contrary the lowest
one goes to LANNA in 2003 Q4
Table 42 provided the summary of the highest MVA and EVA which show the
company exclusives truly created value for the shareholders (Mehdi 2001 Stern and
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Chew 2003) The leading firms PTT and PTTEP show greater value when compared with
the industry average number in the study period Vibul Perngprasert (2006) pointed out the
securities in Thai energy sector in these three years were lead by PTT and PTTEP
Table 42 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
However the average of the all data shows most financial performance is positive
during the empirical period But IRPC has an average negative EVA which means the firm
may destroy market value when invested projects by both debt and stockholders (Mehdi
2001)
42 Correlation Analysis
The researcher uses to correlation analysis testing in EVA EPS RPA and ROE are
dependent on MVA the result is shown in Table 43
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Table 43 Correlation statistics matrix of this study (2006Q4-2008Q3)
Variable MVA EVA EPS ROA ROE
MVA
1
(Sig)
EVA
301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 001 level (2-tailed) Significant level at the 005 level (2-tailed)
This correlation matrix shows that all variables have relationship with MVA since the
significances are all 00 which are less than 05 Thus both value-based performance
measure (EVA) and traditional accounting-based performance measures (EPS ROA and
ROE) have relationship with MVA
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The Person correlation analysis shows EPS has highest association with MAV at
645 much greater than EVA at 301 And they all have positive relationship with MVA
43 Regression Analysis
431 Analyze the innovation measure -EVA
To find out whether if the EVA affects MVA the researcher uses simple regression
method the summary result presented in Table 44 Moreover the researcher classified the
relationship with these two variables in each company and total sample numbers
Table 44 Summary of regression matrix between EVA and MVA
Company Code Sig Adjusted R2
Total Samples 00 850
EGCO 00 5670 RATCH 00 5100 PTTEP 046 1600
BAFS 081 1130 BANPU 263 170
PTT 299 080 LANNA 654 -440 IRPC 926 -550
Note Significant level at the 05
The significance of the estimated coefficients in Table 43 suggests that EVA can
affect MVA in total sample since the significant is less than 05 rejected null hypothesis its
adjusted R2 which means the explanatory power is not excessively high at 850
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Then after examining each sample company there are three of eight companies
EGCO RATCH and PTTEP have the significances less than 05 Table 45 is provided a
more closely look at them
Table 45 Selected coefficients for total sample EGCO RATCH and PTTEP
Unstandardized Coefficients (Beta)
Company Code
Constant EVA
t-value
Total Samples 85456018 1604 3967
EGCO 83356 -2786 -5091
RATCH 221171407 -3351 -4554
PTTEP 23804717 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA
The EVA number of the total -firms has positive affect MVA From Table 45 its
equation can be written as MVA= 85456018+1604 EVA which means if EVA increases
1 MVA will increase 1604
For the individual part there are two companies EGCO and RATCH have negative
affect MVA The equation can be written as follows
(1) EGCO MVA= 83356- 2786 EVA
When EVA increases 1 MVA will decrease 2786
(2) RATCH MVA=221171407-3551 EVA
When EVA increases 1 MVA will decrease 3551
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On the other hand PTTEP has positive one
(3) PTTEP MVA=23804717+3085EVA
When EVA increases 1 MVA will also increase in 3085
432 Analyze the traditional measures (EPS ROA and ROE)
In this session three accounting-based traditional measures (EPS ROA and ROE)
are examined whether can affect MVA in multiple regressions Selected statistics for these
variables are given in Table 46
Table 46 Summary of regression matrix between traditional accounting measures and
MVA
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745 Total
sample ROE 9330395
1073495 2291 Note Significant level at the 005 R=727 R2=529 F=58460
Table 46 indicates that all slope coefficients are zero rejected at 05 level rejected H0
which means all of these three measures affect MVA Moreover the suggestion is that
when only use EPS to examine the explanatory power is 413 And when plus in ROA it
increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can
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59
be attended to 52 Therefore the results not only reject null hypothesis but also are
viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in
Thai energy sector The equation can be written as follows
MVA= 9330395 + 21441742EPS + 5456061ROA + 1073495ROE
It shows all variables have positive direction
433 The results of all independent variables
In this part all variables are examined whether if EVA can better reflect MVA than
traditional accounting measures (EPS ROA and ROE) with MVA by using stepwise
regression Selected statistics coefficients are given in Table 47
Table 47 Summary of regression matrix MVA depends on all independent variables
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304
1073495 2291 Total 8 company EVA 136 - - - -
Note Significant level at the 05 R=727 R2=529 F=58460
When using total samples Table 47 provides the evidence that EVA can not better
reflect MVA than other three traditional accounting-based measures since the significance
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60
is greater than 05 accepted null hypothesis Also the explanatory power of these three
accounting measures (EPS ROA and ROE) is the same as previous one
Therefore the researcher also examines all independent variables in each individual
company Table 47 shows the results of whose independent variables can reflect MVA
which means significances are less than 05
Table 48 Summary of regression matrix between all variables for each company
UnstandardIzed Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
In these regressions the estimated coefficients for EVA EPS ROA and ROE have
different results The followings are the statistic results of each company
(1) BAFS The results show that only ROE has significance less than 05 so accept
null hypothesis of the EVA can not better reflect on market value The explanatory
power is 239 The relationship can be show as MVA= -204926 + 188124 ROE
When ROE increases MVA will increase as well
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(2) BANPU The results accept null hypothesis The evidence shows that EVA can not
better reflect on MVA but EPS can with the explanatory power of 455 The
positive relationship can be shown as MVA=1331347+ 9798842 EPS When EPS
increases MVA will increase as well
(3) ECGO The results show that both ROA and EVA have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 567 And their relationship can be shown as MVA = -11005205-2786 EVA
+1298813 ROA When MVA increase EVA will decrease and ROA will decrease
(4) PTT The evidence shows that EVA can not better reflect on MVA but EPS can
with the explanatory power of 168 The positive relationship can be shown as
MVA=157766409+ 2508091EPS When EPS increases MVA will increase as
well
(5) PTTEP The results show that both ROA and ROE have significances under 05
when examine MVA depends on all independent variables the explanatory power
is 518 Their relationship can be shown as MVA = 5394636 +3752215 ROA -
293536 ROE When MVA increase ROA will also increase and ROE will
decrease
(6) RATCH The results reject null hypothesis The evidence shows that EVA can
better reflect on MVA than EPS ROA and ROE The explanatory power is 51
Their relationship can be shown as MVA = 23804717-3351EVA When EVA
increase 1 MVA will decrease 23804717
All variables are excluded in these two companies IRPC and LANNA
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CHAPTER 5
CONCLUSION DISCUSSION AND SUGGESTION
This chapter is composed of the parts a description on the conclusion of the
research and a discussion relative in other researches as well Then there are limitations
of the research and finally are the suggestions for the future studies
51 Conclusion
The definition of performance measurement is as the process of quantifying the
efficiency and effectiveness of action It can be viewed as ldquothe periodic measurement of
progress toward explicit short-run and long-run objectives and the reporting of the results to
decision makers in an attempt to improve program performancerdquo (Neely et al 1995)
Besides performance measurement means for any firm is to develop an effective
measurement and to win in tough competition by improving capabilities of individuals and
teams (Armstrong and Baron 1998)
To evaluate any firmrsquos operating performance it must achieve profitably and financial
strength as its long-term health and ultimate survival (Thompson et al 2008) Therefore
the concept of valuation underlines everything in GAAP to determine the valued reported
on their statements Under GAAP there are three most popular ratios EPS is served as
the ldquobottom linerdquo shown earnings and dividends per share are given ROA is return on total
assets after interest and taxes to judge the performance and try to find out which part
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should be improve ROE which is net income to common shareholders divided by total
shareholdersrsquo equity tells an important message as the rate they are earning (Brigham and
Houston 2007) A managerrsquos primary goal is to maximize the value of his company but
these traditional accounting-based measures can not measure the creation of shareholdersrsquo
wealth and also have their own back draws (Dennis G and Uyrmura 1996 Stewart 1999)
Thus new value-based mechanisms have been created since late eighties EVA is
one of such metric that try to improve and measure efficiency and create value (Shaked
and Leroy 1997 Stewart 1991) Stewart (1991) defined EVA as ldquothe different between the
profits each unit derives from its operations (NOPAT) and the charge for capital each unit
incurs through the use of its credit linerdquo With equity equivalents it helps managements to
discern which projects will be profitable or not without short-sighted behavior (Young and
OrsquoByrne 2001) Thus EVA has transformed employees into owners to pursuit maximization
of value creation for the firms
A number of different points emerge from the present researches Therefore firms in
Thailand should adopt EVA as to be a primary tool for performance measurement or not
This study aims for investigate if EVA can be suitable for applying to the Thai energy sector
and EVA can be better reflect the operational performance than the EPS ROA and roe in
explaining MVA thereby stock price returns
This is quantitative research by using secondary data over the period 2003 Q4 to
2008 Q3 to evaluate the usefulness of EVA and other accounting-based performance
measures Assuming the equity markets are efficient eight listed companies on SET are
selected The results of three hypotheses of this study can be summarized as follows
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H1 EVA has relationship with MVA in Thai energy sector
The first part of analysis uses total 8 listed Thai energy companiesrsquo EVA numbers
to evaluate the relationship between EVA and MVA The results indicate that found that the
explanatory power is 850 Then the second part is to examine individual situation the
results show that there are only three companiesrsquo EVA numbers are associated with MVA
which are EGCO RATCH and PTTEP The EVA of EGCO and RATCH have negative
relationship with MVA while PTTEP has positive one
H2 Traditional performance measures (EPS ROA and ROE) have relationship
with MVA in Thai energy sector
In this part of the paper the accounting-based performance measures (EPS ROA
and ROE) are specified as explanatory variables more than 50 in regressions with market
returns Of that explanatory power traditional performance measures are still significant at
explaining variation
H3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE)
Above the results of the two hypotheses show that MVA depend on all variables but
EVA has much less explanatory power than EPS ROA and ROE with market returns In
this part when examining all variable of the study in regressions traditional performance
measures have significant explanatory power 52 This also highlights the results obtained
in the second hypothesis where MVA is explained by conventional accounting-based
performance measures
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After analyzing individuals the results show that EVA is a dominant performance
measure in market returns for only one company RATCH with the negative relationship
The evidence of this research shows that EVA may not be suitable for applying to
the Thai energy sector the correlation of MVA depends on all variables show EPS has the
most significant relevance then go to ROA ROE and finally is EVA EVA has relationship
with MVA but can not affect MVA from regression analysis EVA is not a superior
performance measure in explaining market price returns compared with traditional
performance index (EPS ROA and ROE) in the Thai energy sector However Young and
OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any
other measure The researcher suggests that any managers shareholders and participants
can use EVA as an assistant tool with traditional performance measures
52 Discussion
Ehrbar (1998) single out a big part of EVA discussion is about against all other
financial measures The bulk of empirical evidence has discussed about whether EVA is
more highly associated with stock returns than those more conventional financial statement
ratios but till now there are no definitive conclusions
EVA supporters claimed that it is the practicable yardstick not those popular
accounting-based measures in market returns Stewart (1994) stated that EVA is a superior
operating performance measure in explaining changes in shareholder wealth
Uyemura Kantor and Petite (1996) stated that EVA has a high correlation with MVA
while OrsquoByrne (1996) stated that changes in EVA have more explanatory power than
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changes in earnings in long-term stock price returns McClenahen (1998) stated that EVA
metric should become managementrsquos primary tool
Shu Nai-Li (2001) Tu Jen-Hong (2002) Lee Wei-Chiau et al (2005) stated that EVA
has closely relationship with MVA and can affect MVA more than EPS ROA and ROE
In response to these claims Biddle et al (1997) stated that NI is superior
associated with MVA Chen and Dodd (1997) stated that EVA measuresrsquo explanatory power
in different definitions is with no more than 26 of the variation in stock returns Lehn and
Mkhija (1997) Rogerson (1997) reached similar results
Clinton and Chen (1998) stated that firms who use EVA should consider residual
cash flow as an alternative Maumlkelaumlinen (1998) claimed that ROI or IRR are better
operating performance measures when compares to EVA
Knight (1998) stated that EVA can not lead to improve higher stock prices or better
compensation system The evidence showed that EVA is not as accurate as cash flow and
ROI Lewis (2002) stated that high PE ratio is associated with stock returns well
Monczka and Morgan (2000) stated that the excusive management is more
comfortable with the traditional financial measures such as ROS ROI or other popular
ratios since they are easily understood
Li Wu-Lung (2000) stated that EBEI has more relative information content and
Incremental information content than EVA in explaining contemporaneous stock returns and
forecasting future stock returns
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Eljelly and Alghurair (2001) stated that EPS is highly associated with MVA and
suggested investors should consider traditional performance measures as primary tools
when investing in Saudi market
Lin Wen-Ren (2005) stated that EVA EPS ROA and ROE have relationship with
MVA But when compared with their explanatory power in market returns EPS is superior
performance measure for Taiwan tourist industry
Pilliam (2006) stated that ROI ROE and EPS are much more stable than EVA when
explaining stock returns Furthermore the evidence showed that EVA can not predict or
enhance stock performance
This study found all variables have relationship with MVA thereby stock returns But
the findings are not similar as EVA proponents claimed that EVA has highly association
with MVA On contrary the finding supports that traditional financial ratios are much highly
associated with market value similar as Eljelly and Alghurair (2001) Lin Wen-Ren (2005)
Birchard (1994) and Myers (1996) indicated that some firms have tried and abandoned one
or more economic value measures
More detailed comparative studies by using matched samples of both successful and
unsuccessful implementations can help to determine the range to which explanations
provided by ATampT for abandoning economic value measures regard as the effectiveness of
economic value (Ittner and Larcker 1998 refer to Lynch 2002)
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53 Limitations of this study
This study is discussed the relationship between EVA and stock price returns
thereby MVA assumed that the equity markets are semi-strong form efficient the
limitations have been issued as follows
1 A limitation of sample size The data collection is based on public financial
statements thus some companies can not be employed Therefore the study can not cover
all Thai energy sector
2 A limitation of accounting adjustments Accounting adjustments have involved in
many decisions Due to hard to get data from published financial information it can not
apply major items that affect NOPAT and Invested Capital and may cause different EVA
numbers
3 A limitation mentioned by Wood (2000 refer to Geyser and Liebenberg 2003) of
high growth company For the technology intensive industry EVA may not explain changes
well in the firmrsquos true value since negative EVA may be negative times and change year on
year
54 Suggestions for further study
Of course the empirical results have not made a conclusion in this field Perhaps the
most at this point is that research in this field must continue There are at least five ways to
extend this research
1 EVA vs other financial performance measures
In Thailand there are only few studies covering in this field until now Further
researchers can compare EVA with other accounting-based index in explaining stock
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returns for examples ROS residual income net income cash flow EBIT NPVhellip etc Or
separated sample firms as different groups to study whether if it has the difference based
on company size industry types risk characteristics
2 EVA vs other value-based management
Further study also can compare other popular value-based management metrics
which also claimed increase transparency and help companies to evaluate their
performance such as DCF SVA CVA CFROIhellip etc developed by other constant firms
3 EVA vs accounting adjustments
It is hard to get information for accounting adjustments most items are confidential
Thus the further researcher can study for certain company to give a direction for EVA
implement deign
4 EVA vs manager compensation system
Wallace (1998) stated that EVArsquos most powerful distinguishing feature is its fit to
management compensation system Further researchers can make a comparison of whom
use EVA modern excusive compensation plans against firms who only use traditional
accounting-based incentives or study EVA and MAV as determinants of excusive
compensation in one specific company
Young and OrsquoByrne (2001) stated that value-based management (of course included
EVA) help managers unite the systems and thinking in want of creating value for their own
shareholders Further researchers can have a deep study on how they change their
companies after adopting EVA
5 EVA vs other financial systems
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There are some suitable financial metric and systems Roztocki and Needy
(Retrieved 2008) suggested a combined system which is a activity based costing (ABC
system) with efficient accounting pooled data analyzing and EVA with a determination of
how value was build (Rago 2008) Further study can discuss how to develop
organizational capabilities by combining ABC system or non-financial performance
measurement such as the balanced scorecard and EVA to give senior executive a way to
executing their strategy
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BIBLIOGRAPHY
Ahmad Ismail (2006) Is economic value added more associated with stock return than accounting earnings The UK evidence International Journal of Managerial Finance Vol 2 No 4 pp 343-353
Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Akiston H Hamburg J amp Ittner C (1997) Linking quality to profits Milwaukee WI
SQC Quality Press Armstrong M and Baron A (1998) Performance Management The New Realities
Institute of Personnel and Development London Andrew C Worthington and Tracey West (2001) Economic Value-Addedreg A Review of
the Theoretical and Empirical Literature Asian Review of Accounting 9(1) pp 67-86
Anderson A M Bey R P amp Weaver S C (2005) Economic Value Addedreg
Adjustments Much to Do About Nothing Retrieved January 2008 from httpwwwlehighedu~incbeugAttachmentsAnderson20EVA204-7-05pdf Anthony R (1973) Accounting for the cost of equity Harvard Business Review V5188-
102
Aswath Damodaran (2002) Economic Value Added (EVA) chapter EVA and MVA
Benedikt Wahler (2001) Economic Value Added A comprehensive Financial Management System Seminararbeit zur Erlangung eines Leistungsnachweises
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d
72
im Fach Risiko Management Biddle G C and Bowen R M (1997) Does EVA beat earnings Evidence on
associations with stock returns and firm values Journal of Accounting and Economics 301-336
Brottger R (1999) Economic Value Added The essence to creating real wealth
Unpublished Mumeo Department of Economics University of Stellenbosch Brealy RA and Myers SC (2000) Principles of Corporate Finance Irwin Burr
RidgeIllinois Brigham Eugene FLouis C Gapenski and Michael C Ehrhardt (1999) Financial
Management ndash Theory and Practice 9th edition The Dryden Press Fort Worth Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
China Business Daily News (2008Feb16)
httpwwwbjgzwgovcngzjcmzwz152200803170110htm Clinton BD amp Chen S (1998) Do New Performance Measures Measure
Up Management Accounting 80 4 38ndash44 Creelman J (1998) Building and implementing a Balanced Scorecard International
best practice in strategy implementation London Business intelligence Ltd Danai Liseadiratanakul and Chanuan Uarkarn (2008) Reflector Design for High
Efficiency Fluorescent Fixtures by Photopia Program Kasen Bundit Journal vo9 no1Jan-Jun2008
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73
Dillion Ray and James E Owers (1997) EVA as a Financial Metric Attributes Utilization and Relationship to NPV Financial Practice and Education 7 No 1 SpringSummer 32-40
Drucker P (1998) The Information Executives Truly Need to Know in Harvard
Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth
Creation in an Emerging Market The Case of Saudi ArabiaInternational Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen (Sep1998) Economic Value Added as a management tool Helsiniki
School of Economics and Business Administration Retrieved January 2008 from httpwwwevanomicscomevastudyshtml
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Fama E F(1970) Efficient capital markets A review of theory and empirical work
Journal of Finance Vol25 pp383-417 Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 F Modigliani and MH Miller (1958) The Cost of Capital Corporation Taxes and the
Theory of Investment The American Economic Review
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serve
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74
Fernandez Pablo (May 2001)EVA Economic Profit and Cash Value Added Do Not Measure Shareholder Value Creation IESE Business School
Finegan PT (1991) Maximizing shareholder value at the private company Journal of
Applied Corporate Finance 4(1) Spring 30-45 Gates S (2000) Strategic performance measurement systems translating strategies
into results Journal of Applied Corporate Finance Fall Vol 13 No 3 pp44ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1994) EVA Fact and Fantasy Journal of Applied Corporate
Finance 7(2) 71-84 GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 George Athanassakos (2007) Value-based management EVA and stock price
performance in Canada Richard Ivey School of Business The University of Western Ontario London Canada Vol 45 No 9
Grant JL (1997) Foundations of Economic Value Added Frank Fabozzi New Hope Hall JH (1998) Variables determining shareholder value of industrial companies listed on the Johannesburg Stock Exchange University of Pretoria Pretoria Hamilton R (1777) An Introduction to Merchandize Edinburgh
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ธ มหาว
ทยาลย
หอการ
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ย
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hts re
serve
d
75
Harley E Ryan Jr and Emery A Trahan (1999)The Utilization of Value-Based Management An Empirical Analysis Financial Practice and Education Spring
Summer Hatfield GR (2002) RampD in an EVA world Research Technology Management JanFeb
2002 Vol 45 No 1 pp41ndash47 Hawawini G Subramanian V amp Verdin P (2003) Is performance driven by industry -
or firm - specific factors A new look at the evidenceStrategic management journal Vol 24 (1) pp1-16
Hausman J A (1978) Specification Tests in Econometrics Econometrica Vol 46 No
6 Nov1978 pp1251-1271 Heidorn ThomasHans-Dieter Klein and Frank Siebrecht (2000) Economic Value Added
zur Prognose der Peformance europscher Aktien Arbeitsberichte der Hochschule fur Bankwirtschaft Nr 27 Hochschule fur Bankwirtschaft ndash Private Fachhochschule der Bankakademie (ed) Dezember 2000 FrankfurtMain
Hsu Wen-Chi (2002) Study of the relationship between economic value added and stock return MBA program in Tunghai University
Huang Shu-Fang (2002) The Correlation between EVA and MVA in Taiwanrsquos Banks MBA program in National Taiwan University
Irwin Ross (winter 1997) 115 The 1996 Stern Stewart Performance 1000 Journal of Applied Finance 9 no4
Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from
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ธ มหาว
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hts re
serve
d
76
httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Ittner CD amp Larcker DF (1998) Innovations in performance measurement Trends and research implications Journal of Management Accounting Research Vol (10) pp 205-238 Summary by Antoinette L Lynch PhD Program in Accounting University of South Florida Spring 2002 from httpmaawinfoArticleSummariesArtSumIttnerLarcker98htm
Jansen C (1998) South African Marine Corporation Limited Using Economic Value Added for capital project evaluation University of Cape Town Graduate School of Business South Africa
JHvH de Wet (2005) EVA versus traditional accounting measures of performance as drivers of shareholder value ndash A comparative analysis Meditari Accountancy Research Vol 13 No 2 2005 1-16
Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1996) Evareg An integrated
financial management system European Financial Management Joel Stern G Bennett Stewart III and Donald H Chew Jr (1998) The EVA Financial
Management System in Chew Donald H jr(ed) The New Corporate Finance Where Theory Meets Practice 2 nd edition Boston 140-154
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel M Stern and JS Shiely (2001) The EVAreg Challenge Implementing Value-Added
Change in Organization John Wiley amp Sons Inc
ลขสท
ธ มหาว
ทยาลย
หอการ
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ย
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right
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hts re
serve
d
77
Joel Stern (2008) The World of Finance Business Brief JuneJuly 2008 from httpwwwsternstewartcomresearchstudies2aspxID=1636
John A Kay and J A Kay (January 1993) Foundations of Corporate Success How
Business Strategies Add Value Oxford University Press USA John Ballow Henric Persson and Fred Knechtel (2001) EVA and the Chemical Industry
How Do Companies Rank EVA and the Chemical Industry How Do Companies Rank ICIS Chemical Business from httpwwwiciscomArticles20010903146008eva-and-the-chemical-industry-how-do-companies-rankhtml
Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Joseph Chang (July 1997) Spreading EVA Chemical Market Report Kaplan RS amp Norton DP (1996) The Balance Scorecard Translating Strategy into
Action USA Harvard Business School Press Kidusan Yohannes Weldeghiorgis(2004) Performance Measurement Practices in
Selected Eritrean Manufacturing Enterprises A dissertation of University of the Free State Republic of South Africa
Keen Peter (1999) Economic Value Added in Keen Peter Every Managerrsquos Guide to
Business Processes internet document accessed 05022001 httpwwwpeterkeencomemgbp007htm
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ธ มหาว
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hts re
serve
d
78
Knight James A (1998) Value based management developing a systematic approach to creating shareholder value New York USA Mc Graw-Hill companies
Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49 Lars Oxelheim and Clas Wihlborg (2001) Recognizing macroeconomic fluctuations in
value based management Journal of Applied Corporate Finance Vol 15 No 4 2003
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of
TSMC Journal of Jen-Teh12838 P37-48 Lehn Kenneth and Anil K Makhija (1996) EVA amp MVA as Performance Measures and
Signals for Strategic Change Strategy amp Leadership 24 (No 3 MayJune) 34-38 Lewis Jane (2002) Measuring Company Assets Personnel Today p18 Li Wu-Lung (2000) A study of performance measures and stock price returns
Graduated School of Accounting National Taiwan University
Lin Cheng-Wang (2002) A Study of EVA in Measuring the Operating Performance of Taiwan Commercial Banks MBA program Yuan Ze University
Lin Ciang-Liang and Kuan Yuh-Lih (2007) An Association Study of Economic Value Added and Residual Income with Firm Value Journal of Risk Management Vol9 No1 March 2007pp 27-44
Lin Wen-Ren (2005) Evaluate Performance Measures in Taiwan Tourist Industry MA in
Finance Department National Kaohsiung Technology University
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ธ มหาว
ทยาลย
หอการ
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right
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hts re
serve
d
79
Lintner J (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets Review of Economics and Statistics 47 13-37
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry
EMBA program Industrial economics National Central University Taiwan Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Martin JD and Petty JW (2000) Value-based management the corporate response
to the shareholder revolution Boston Massachusets Harward Business School Press
Mehdi Sheikholeslami (2001) EVA MVA and CEO Compensation American Business
Review 19
M Geyser and IE Liebenberg (2003) Creating a New Valuation Tool for South African Agricultural Co-operatives Agrekon Vol 42 No 2 (June 2003) httpageconsearchumnedubitstream9504142020106pdf
Michael Rago(2008) An Analysis of Economic Value Added MBA program Liberty University from httpdigitalcommonslibertyeducgiviewcontentcgiarticle=1031ampcontext=honors
Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of Applied Corporate Finance 9 no1 Spring 104-115
Monczka Robert M and Morgan James P (2000) Why Economic Value Add Needs to Be Measured Purchasing 08102000 Vol 129 Issue 2 p77
Mossin J (1966) Equilibrium in a Capital Asset Market Econometrica 35 768-783
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hts re
serve
d
80
Neely A (1999) The Performance Measurement Revolution Why Now and What Next International Journal of Operations amp Production Management Vol 19 (2) pp 205-228
Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University OrsquoHanlon John O and Ken Peasnell (1996) Measure for Measure Accountancy-
International Edition 117 (1230 Feb) 44-46 OrsquoHanlon J KV Peasnell (1998) Wall Streetrsquos contribution to management
accounting the Stern Stewart EVA financial management system Management Accounting Research 9 421-444
Paul A Dierks and Ajay Patel (Nov1997) What is EVA and How Can It Help Your
Company Management Accounting 79 no5 52 PC Brewer G Chandra and CA Hock (Spring 1999) Economic value added (EVAreg)
its uses and limitations Society for the advancement of management (SAM) Adv Manage J pp 4ndash11
Pretorius JL (1997) Economic value added as an alternative method of valuation
Randse Afrikaanse Universiteit (RAU) Johannesburg Ralph Palliam(2006) Further evidence on the information content of economic value
added Review of Accounting and Finance Vol 5 No 3 pp 204-215 Rappaport A (1986) Creating Shareholder Value The Free Press New York
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ธ มหาว
ทยาลย
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right
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hts re
serve
d
81
Rawinun Ekaluksananon (2003) Study of relationship between economic value added and shareholder value of companies listed in SET MBA program Chulalongkorn University
Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Rennie P (1997) Finding the Best and the Worst Wealth Creators Business Review
Weekly 19(30) 26-27 Richard A Brealey Stewart C Myers and Alan J Marcus (1999) Fundamentals of
Corporate Finance 2nd New York McGraw Hill 401407 Robert A Manning (Spring 2000) The Asian Energy Predicament Survival vol 42
no373ndash88 The International Institute for Strategic Studies Robert Ferguson Robert Ferguson and Susana Yu (2006) Trading Strategy on EVA
and MVA Are They Reliable Indicators of Future Stock Performance Journal of Investing Date posted December 19 2005 last revised December 19 2005
Rober T Kleiman (1999) Some New Evidence on EVA Companies Journal of Applied
Corporate Finance 12 no2 (Summer 1999)90-91 Rogerson WP (1997)Intertemporal Cost Allocation and Managerial Investment
Incentives A Theory Explaining the Use of Economic Value Added as a Performance Measure Journal of Political Economy 105 4 770-795
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hts re
serve
d
82
Roztochi N and Needy K(1998) EVA for small manufacturing Companies An Integrated Activity-Based Costing and Economic Value Added as an Engineering Management Tool for Manufacturers
mdashmdashmdash (nd) An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers Retrieved January 2008 from httpwww2newpaltzedu~roztocknvirginia98pdf
Ryan HEJrand Trahanm EA (1999) The Utilization of Value-Based Management an
Empirical Analysis Financial Practice and Education vol9 SpringSummer 46-58 Ryu Kyeong-Pyo (2000) A Study for the Introduction of EVA as a Management
Performance Evaluation System in Korea MBA program Massachusetts Institute of Technology
Russ Ray (2001)Economic Value Added Theory Evidence A Missing Link Business
Review pp66-70 Shaked I Allen M and Leroy P(1997) Creating Value through EVA myth or Reality
Journal of Strategy and Business Issue 9 Fourth Quarter 1997 Retrieved March 20 2007 from httpwwwstrategybusinesscompress1663550712756
Sharpe W Alexander G amp Bailey J (1999) Investments New Jersey USA Prentice
Hall Inc Shawn Tully (1993) The Real Key to Creating Wealth Fortune 128 No 6 p38-50 Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
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ธ มหาว
ทยาลย
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hts re
serve
d
83
Solomons D(1965) Divisional Performance Measurement and Control Homewood IL Irwin
Stephens Kenneth R and Ronald R Bartunek (1997) What is Economic Value Added
A Practitionerrsquos View Business Credit 4 No99 Apr 39 Stern Stewart amp Co(1999) httpwwwsternstewartcomanout_evaabout_eva_mainhtml
Accessed Feb 1999 Suprawin Na (2005) The relationship between EVAreg and prices of securities Chaing
Mai University
Tomas P Rima T (2008) Corporate Performance and the Measures of value added Dept of Financial Engineering Vilnius Gediminas Technical University 23(3) 194ndash201
Tokokeizai Magazine (2000)Top 1000 Japanese Corporation in EVA and MVA from httptwtrendmicrocomtwaboutnewsprarticle20070919092534html
Tu Jen-Hung (2000) A Research of EVAreg Explaining MVA in High-Tech Industry MBA program National Chung Cheng University 2001 77-78
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Vibul Permgprasert (2006) Value Way Security in Energy Sector Retrieved Jan 8 2007 from httpwwwthaovicomarticlevalue-way350-html
Weera Weerakhajprmsak (2007) Asset Pricing in Energy Sector The Evidence from Stock Exchange of Thailand Global MBA program University of the Thai Chamber of Commerce
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84
Weber Matthias-Wilbur and Maximilian Koch(2000) Berucksichtigung von Risikoaspekten im EVAreg Management- undVergutungssystem in JohanningLutzand Bernd Rudolph (eds) ldquoHandbuch Risikomanagementndash Band 2 Risikomanagement in Banken Asset Management Gesellschaften Versicherungs- und Industrieunternehmen Uhlenbach Verlag Bad Soden
Weston FJ and Copeland TE(1992) Managerial Finance 9th edition Dryden Press
New York Wet D (2005) EVA versus traditional accounting measures of performance as drivers
of shareholder value ndash A comparative analysis Meditari Accountancy Research 13(2) 1ndash16
William G Zikmund (2003) Business Research Methods 7th Edition Thomson Learning
South-Western USA Wood N (2000) Economic value added (EVA) Uses benefits and limitations ndash A South
African perspective Southern African Business Review 4(1)46ndash53 Young S David and Stephen F OrsquoByrne (2001) EVAreg and Value-Based Management ndash
A Practical Guide to Implementation New York McGraw-Hill Yang Lien-Tse (2005) Analyzing and Evaluating the Operating Performance of Banks
in Taiwan -The Application of EVA Tong-Wu University Graduated School in Accounting Dep
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86
APPENDIX A
Market Capital from 2003-2008 on SET
2008 2007 2006 2005 2004 2003
Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec Jan - Dec
agro 14433882 21668197 19288210 16589417 10966334 12266776 agri 4802914 7191749 7533666 6923318 4740303 5176782 food 9630968 14476449 11754544 9666099 6226031 7089994
consump 5661384 7268675 6801626 6305839 4853392 5265267 fashion 4324573 5385870 4890435 4847431 3252075 3846339 hhold 787990 1213771 1351094 990209 987292 1282853 person 548821 669034 560098 468200 385500 136075 fincial 61184199 115287190 93911792 99899480 88872037 100294926 bank 53240708 97840433 78416098 83613096 68964782 77369398 fin 3893864 11400708 10821642 12326630 16349102 19175741
insur 4049627 6046049 4674051 3959754 3558154 3749787 indus 15547078 38251311 33344857 24520127 27457929 31924659 auto 1994498 3881880 4117020 4414782 3564086 4633774 mach 104562 112355 123865 189920 paper 443219 2605176 2550905 1953406 2975083 3348120 petro 7988637 24458832 18717209 16578391 18756726 21751397 pkg 1100647 1385951 1175464 1461193 2038168 2001448
propcon 43107324 87284564 80659225 80903778 78774124 87359789 conmat 19836763 41236173 42250000 48064046 49805709 49575555 prop 23270561 46048390 38409225 32839732 28968415 37784234
resourc 123224123 237125708 144078859 128715003 96940389 87786307 energ 122923153 236181320 143163559 128319503 96594609 87411147 mine 300969 944388 915300 395500 345780 375160
service 41455802 73279543 65677923 55766661 55641888 47510698 comm 14527903 17411864 14990794 11077632 10028095 10513371 helth 6224771 9779094 9208014 6190298 4304837 2592743 media 8318213 13593528 10396360 11497410 11542691 15285847 prof 135860 411200 108300 248400 375600 154350
tourism 3629057 5761080 5870128 3323845 3796887 3538498 trans 8619998 26322777 25104327 22113843 23984862 15425889 tech 44485475 64087234 48614303 65803284 63644758 58388237
comun 40705731 54795071 40844912 56101259 55164779 46613709 elec 2345982 2501769 3199121 4551012 etron 3779745 9292163 7769391 7200256 5280858 7223516
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d
APPENDIX B
Company Profile Each background of the eight sample companies in Thai energy sector is briefly
overviewed as follows
1 Bangkok Aviation Fuel Services Public Company Limited
The companys primary mission is to provide aircraft fuelling service to domestic
and international airlines under the name of Bangkok Aviation Fuel Services Public
Company Limited or BAFS
BAFS was given rights by the Thai government to install the aviation fuel storage
facilities and operate the fuelling service at Bangkok International Airport There are two
fully computerized control centers the Main Depot Control Room and Intoplane Substation
They control the entire system for storage quality control analysis and aviation fuelling
service
2 Banpu Public Company Limited
After over two decades of dynamic growth Banpu today is not only one of the
foremost energy companies in Thailand but is rapidly becoming a leading regional coal
player through its operations in Indonesia and its investments in China Banpu has two
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88
core and complementary business lines - coal mining and coal-fired power generation
Banpu has demo started core competence and competitive advantages in the cost-
efficient development and operation of open-pit coal mines in Asia - and in both domestic
and export grade thermal coal market Through recent investment Banpu is also now
developing skills in underground mining Banpu currently manages production capacity of
around 20 million tonnes per annum from its mines in Indonesia and Thailand
Banpu has been a pioneer in the successful development of IPPs and SPPs in
Thailand The Company now intends to use this experience and expertise to develop a
business line of coal-fired power that is both complementary to and synergistic with its coal
mining business Currently Banpu has an investment in two power generation companies
in Thailand namely BLCP Power Limited a new 1434 MW coal-fired power IPP in Rayong
Province and Ratchaburi Electricity Holding Public Company Limited (RATCH) a gas-fired
power plant in Ratchaburi Province Banpu also owns three combined heat and power
(CHP) operations in northern China namely Luannan and Zhengding in Hebei Province and
Zouping in Shandong Province In the near future Banpu in collaboration with RATCH and
The Government of the Lao Peoples Democratic Republic (Lao PDR) will develop the
Hongsa project a 1800 MW ine-mouth power plant project in Hongsa District Xayabury
Province of Lao PDR
3 Electricity Generating Public Company Limited
The Electricity Generating Public Company Limited (EGCO) is the first independent
Power Producer in Thailand to be established on May 12 1992 through the partial
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89
privatization of the state enterprise the Electricity Generating Authority of Thailand (EGAT)
with the aim to reduce the states financial burden encourage the private sector to
participate in energy sector and enhance the efficiency of the electricity generation
EGCO is structured as a holding company with a number of subsidiaries This type
of structure is generally recognized worldwide as best to promote management flexibility and
efficiencyIts main business is to produce electricity and supply it to EGAT under long-term
power purchase agreement EGCO also searches for other good opportunities for growth in
the energy related to the core business The objective is to maintain the leading position in
the electricity generation aiming at favorable return on investment and maximizing the
stakeholdersrsquo value
4 IRPC Public Company Limited
IRPC Public Company Limited or ldquoIRPCrdquo (ldquoCompanyrdquo) formerly Thai Petrochemical
Industry Public Company Limited or ldquoTPIrdquo was registered in 1978 by Leophairatana family
TPI had been transformed to a public company limited on October 10 1994 and listed on
the SET on March 17 1995 Started as a producer of plastic in 1982 IRPC gradually
expanded itrsquos of producer and facilities to become a fully- integrated petrochemical
complex
The Company was suffered from financial crisis after the Thai government announced
the change of the exchange rate system to the Managed Float System in 19997 and went
into debt restructuring process in 2000 The debt restructuring had completed successfully
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90
on April 26 2006
IRPC was subsidiaries Southeast Asias first fully-integrated petrochemical complex
are located in Rayong on its own industrial park with supported facilities such as a deep
sea part tank farm and a power plant
5 The Lanna Resources Public Company Limited
Lanna Resources Public Company Limited formerly named Lanna Lignite Public
Company Limited was established on the 4th of October 1985 with the initial registered
capital of baht 100 million The Companyrsquos main and only objective was in lignite mining
and selling from Pa Kha lignite deposit located in Lumphun Province The Company had
earlier acquired a 20-year mining right within the concession area of the Department of
Energy And Promotion formerly the National Energy Administration
6 PTT Public Company Limited
PTT Public Company Limited was incorporated as a public company on October 1
2001 on corporatization from the Petroleum Authority of Thailand under the Corporatization
Act of BE 2542 (1999) that is assumed transfer of all business rights debts liabilities
assets and equity from Petroleum Authority of Thailand The structural in business of PTT
is separated into core business and oversea investment as follows
(1)Core Business (i)Exploration amp Production and Gas Business Group is composed of
business unit of natural gas that has a responsible as gas exploration (both domestic and
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91
international) petroleum transportation and natural gas separation plant (ii)Oil Business
Group Business operation of PTT could be separated into two main activities which are Oil
Marketing and Trading These include import amp export of oil product and petrochemical and
also invest on the business that concerned with the oil(2) Oversea Investment PTT has an
investment in several businesses mostly in petrochemical and extraction
7 PTT Exploration and Production Public Company
Founded on June 20 1985 PTTEP was established in accordance with the Thai
Cabinetrsquos firm resolution to strengthen Thailandrsquos energy stability as well as to minimize
costly petroleum imports Accordingly the Government authorized the Petroleum Authority
of Thailand to establish PTT Exploration and Production Company Limited or PTTEP with
its goal to explore develop and produce Thailandrsquos petroleum reserves to maximize the
Countryrsquos highest possible benefit from energy resources
With the remarkable expansion of PTTEP business operations both domestically
and internationally the Company resolved to reduce the Statersquos administration and funding
burden In 1992 therefore PTTEP mobilized significant additional funding by registering as
a public company At present PTT Exploration and Production Public Company Limited has
a registered capital of baht 3322 million The Companyrsquos major shareholder is PTT Public
Co Ltd Besides its core business of petroleum exploration and production PTTEP has
extended its investments into strategic downstream projects and in proactive response to
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92
the governmentrsquos liberalization policy towards natural gas producers PTTEP has also
entered the power generation sector to enhance and sustain its core business
8 Ratchaburi Electricity Generating Holding Public Co LTD
Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) a
leading investment company in power generation business was founded on March 7 2000
following cabinetrsquos approval on November 30 1999 The cabinet has approved the fund
mobilization plan for Ratchaburi power plant project through the initial public offering of 580
million common shares of the Company that had been succeeded on October 2000
Currently the Company is a listed company and being registered on the Stock Exchange of
Thailand (SET) using the stock symbol as ldquoRATCHrdquo The Companyrsquos major shareholder is
the Electricity Generating Authority of Thailand (EGAT) holding 45 percent of the
Company
At present the Company has a total installed capacity of 3995 MW deriving from
its current commercial operating power plants Moreover the Company has many ongoing
projects both in local and overseas which can enhance its total installed capacity to
450050 MW in the near future
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APPENDIX C
Statistics Analysis Results
BAFS
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 6351 1466 319723 1893 Q1-2004 14517 -205 320192 1807 Q2-2004 9628 103 336166 2003 Q3-2004 9628 091 396008 2146 Q4-2004 6514 815 422378 2058 Q1-2005 11363 159 499171 1982 Q2-2005 9696 085 553537 1912 Q3-2005 13432 235 604266 2095 Q4-2005 7690 170 654383 2139 Q1-2006 12634 220 654383 2066 Q2-2006 10021 -209 635361 2112 Q3-2006 11742 139 661791 1941 Q4-2006 16300 098 712156 2097 Q1-2007 20968 144 700653 2119 Q2-2007 18731 441 670034 2342 Q3-2007 18165 309 667291 2485 Q4-2007 12521 233 667126 2193 Q1-2008 18650 170 664615 1985 Q2-2008 16128 113 654331 1871 Q3-2008 15254 024 644855 1765
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94
Time of common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 340000000 1280 1757760000 259424 1553 1893 019 Q1-2004 340000000 1110 3271860000 50214 1558 1807 032 Q2-2004 340000000 1080 1336740000 233526 1673 2003 029 Q3-2004 340000000 1070 2044190000 162781 1362 2146 030 Q4-2004 340000000 1150 2042070000 159593 1261 2058 016 Q1-2005 340000000 910 2232440000 167756 1163 1982 034 Q2-2005 425000000 900 2333280000 153422 1071 1912 024 Q3-2005 425000000 91 2365660000 145934 1115 2095 033 Q4-2005 425000000 910 2436220000 143128 1074 2139 015 Q1-2006 425000000 905 2564050000 128220 1006 2066 030 Q2-2006 425000000 1050 2906180000 195518 964 2112 024 Q3-2006 425000000 1130 2529410000 227309 902 1941 025 Q4-2006 425000000 1050 2666490000 179601 1023 2097 030 Q1-2007 509998044 1100 2842410000 183259 1176 2119 038 Q2-2007 509998044 1060 2906180000 249980 1353 2342 030 Q3-2007 509998044 1080 2954610000 255337 1477 2485 029 Q4-2007 509998044 1120 3039580000 267240 134 2193 014 Q1-2008 509998044 1040 3185790000 211819 1301 1985 028 Q2-2008 509998044 960 3147300000 174868 1266 1871 024 Q3-2008 509998044 760 3199050000 67694 1235 1765 025
BANPU
Period EBIT(1-T) WACC IC EVA
(Million Baht) Q4-2003 74636 2863 3070322 -804480 Q1-2004 27441 -986 2911265 314517 Q2-2004 101571 -157 2949380 147883 Q3-2004 127088 054 3067328 110460 Q4-2004 126746 175 3337680 -787979 Q1-2005 157402 175 3535319 95554 Q2-2005 172493 007 3493612 170196
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d
95
Q3-2005 186651 508 3290732 19598 Q4-2005 92327 -151 3718396 148390 Q1-2006 95095 202 3620499 22034 Q2-2006 95592 -278 3559840 194733 Q3-2006 101078 111 3445744 62817 Q4-2006 131382 017 3986257 124555 Q1-2007 142467 165 4036172 75842 Q2-2007 173816 1044 4446516 -290394 Q3-2007 171002 557 4429792 -75671 Q4-2007 193227 -094 5554040 245585 Q1-2008 195277 -327 5453640 373777 Q2-2008 250858 -190 7271789 389149 Q3-2008 344819 -1520 7288684 1452616
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 354050479 12800 22355490000 2296297 1042 1322 224 Q1-2004 354050479 12900 31891860000 1378065 947 1157 066 Q2-2004 354050479 12900 11588260000 3408425 1203 1453 416 Q3-2004 354050479 16000 20783450000 3586463 1471 1765 439 Q4-2004 354050479 15200 23115630000 3070004 1488 1614 423 Q1-2005 354050479 16200 24210270000 3314591 1986 2354 578 Q2-2005 354050479 14900 23598300000 2915522 2215 2546 584 Q3-2005 354050479 16000 21509210000 3513887 2388 2856 619 Q4-2005 354050479 13100 21886340000 2449427 2056 2495 267 Q1-2006 354050479 14900 21115170000 3163835 1804 2117 273 Q2-2006 354050479 12900 20383190000 2528932 1593 1828 297 Q3-2006 354050479 14600 19901140000 3179023 1282 1552 325 Q4-2006 354050479 18200 22343920000 4209327 1280 1556 433 Q1-2007 354050479 20000 22681880000 4812822 1414 1987 439 Q2-2007 354050479 26800 24938020000 6994751 1630 2258 647 Q3-2007 354050479 34800 25751790000 9745778 1799 2610 632 Q4-2007 354050479 40000 38497300000 10312289 1699 2356 730 Q1-2008 354050479 41600 40311120000 10697388 1869 2579 763 Q2-2008 354050479 52800 42053580000 14488507 1686 2604 846
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Q3-2008 354050479 29400 43926770000 6016407 1999 2933 114
5
EGCO
Time EBIT(1-T) WACC IC EVA (Million
Baht) Q4-2003 138777 1550 4922292 -624379
Q1-2004 152480 -534 4997373 419187
Q2-2004 152480 155 4931044 54432
Q3-2004 141087 206 4948341 39333
Q4-2004 115186 1055 4987285 -410952
Q1-2005 157402 226 5168945 35217
Q2-2005 106758 126 5142520 42211
Q3-2005 108884 371 5303462 -87761
Q4-2005 101371 334 5212373 -72650
Q1-2006 209234 264 5836458 55385
Q2-2006 167601 -180 6065733 276965
Q3-2006 150886 256 6058705 -4290
Q4-2006 150886 044 6094951 89508
Q1-2007 116397 260 4862680 78901
Q2-2007 199893 1157 4929635 -370541
Q3-2007 194577 645 5038083 -130163
Q4-2007 99546 319 5064268 -61907
Q1-2008 223803 -114 5345592 284754
Q2-2008 126449 003 5266134 124754
Q3-2008 531716 -1184366 1610 531716
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 530000000 9000 26701040000 2099896 1628 2602 221 Q1-2004 530000000 6700 54950880000 -1944088 947 1555 268 Q2-2004 530000000 6750 28027870000 774713 1517 2174 211
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Q3-2004 530000000 6650 28358190000 688681 1408 1925 244 Q4-2004 530000000 7400 29102940000 1011706 1383 1728 165 Q1-2005 530000000 7400 30719830000 850017 1685 1342 285 Q2-2005 530000000 7900 30816420000 1105358 1306 1576 160 Q3-2005 530000000 7350 31071540000 788346 1199 1423 168 Q4-2005 530000000 8100 32114510000 1081549 1150 1383 165 Q1-2006 530000000 7850 34402920000 720208 1484 1214 395 Q2-2006 530000000 7300 35014950000 367505 1332 1699 301 Q3-2006 530000000 8000 35470580000 692942 1429 1842 266 Q4-2006 530000000 9550 36584520000 1403048 1382 1817 186 Q1-2007 530000000 9800 38402550000 1353745 1830 1536 482 Q2-2007 530000000 10800 40020070000 1721993 1582 2021 472 Q3-2007 530000000 11600 41133100000 2034690 1691 2234 449 Q4-2007 530000000 11200 41995700000 1736430 1592 2186 192 Q1-2008 530000000 9600 44745270000 613473 1890 2116 535 Q2-2008 530000000 8450 44745520000 3948 1716 1823 274 Q3-2008 530000000 6300 45233660000 -1184366 1610 1706 382
IRPC
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 80518 576 12190143 -621873
Q1-2004 277379 -262 11771849 586366
Q2-2004 112115 033 12006061 72663
Q3-2004 338534 030 12200153 301810
Q4-2004 540903 060 8939310 -243498
Q1-2005 214250 -090 9145226 145760
Q2-2005 63563 -090 9092857 145119
Q3-2005 317497 196 9403930 133099
Q4-2005 1403468 -871 13459129 2576301
Q1-2006 214250 153 13624434 6303
Q2-2006 319263 -619 13794667 1173192
Q3-2006 232501 3646 14054181 -4891598
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98
Q4-2006 -259704 2324 11306203 -2887221
Q1-2007 265983 12046 11566343 -13667042
Q2-2007 334420 1325 9687432 -949558
Q3-2007 265661 858 10792775 -659878
Q4-2007 123598 207 10898998 -102437
Q1-2008 136881 -535 11213309 736503
Q2-2008 378984 -772 12436383 1338457
Q3-2008 -521723 -1219 11761481 911603
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 8100000000 1370 12738510000 9823149 662 3716 -003 Q1-2004 8100000000 600 122743300000 -7414330 792 7282 031 Q2-2004 8100000000 935 107565990000 -3183099 802 7268 001 Q3-2004 8100000000 785 13594240000 4999076 830 5240 040 Q4-2004 8100000000 730 20368310000 3876169 1260 7421 085 Q1-2005 8100000000 845 22628450000 4581655 1160 7178 028 Q2-2005 19500000000 1300 22575490000 23092451 1095 7057 002 Q3-2005 20475000000 1410 25989850000 26270765 2069 6387 048 Q4-2005 20475000000 810 100710390000 6513711 1894 10038 642 Q1-2006 20475000000 740 103332420000 4818258 1849 9698 013 Q2-2006 20475000000 690 107260360000 3401714 2017 10002 020 Q3-2006 20475000000 685 109694840000 3055891 2975 9412 013 Q4-2006 20475000000 610 71622200000 5327530 637 743 -012 Q1-2007 20475000000 600 86131450000 3671855 682 831 018 Q2-2007 20475000000 605 87946710000 3592704 708 858 023 Q3-2007 20475000000 690 89101760000 5217574 788 928 018 Q4-2007 20475000000 635 90415140000 3960111 1092 1499 008 Q1-2008 20475000000 575 94404860000 2332639 939 1229 008 Q2-2008 20475000000 406 95642900000 -1251440 977 1277 026 Q3-2008 20475000000 406 89664590000 -653609 384 426 -023
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99
LANNA Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 2240 4184 106044 -69271
Q1-2004 4985 -1165 180258 25993
Q2-2004 949 -099 189559 2822
Q3-2004 4631 -252 208372 9889
Q4-2004 11136 3811 201370 -65609
Q1-2005 15611 042 219199 14680
Q2-2005 21396 -053 240881 22677
Q3-2005 16109 574 225043 3196
Q4-2005 8012 -116 233256 10716
Q1-2006 15052 218 244789 9721
Q2-2006 16783 -1082 253467 44207
Q3-2006 14630 053 258970 13266
Q4-2006 7923 -140 250491 11437
Q1-2007 17435 200 262706 12179
Q2-2007 19804 2749 261463 -52081
Q3-2007 11189 981 275111 -15809
Q4-2007 4950 -016 255372 5351
Q1-2008 25431 -461 288334 38729
Q2-2008 19778 -105 314150 23071
Q3-2008 24826 -2206 294585 89800
Time of
common shares
closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 350000000 700 1698400000 75160 312 382 009
Q1-2004 350000000 570 1709210000 28579 539 552 016
Q2-2004 350000000 1000 42950000 345705 640 736 005
Q3-2004 350000000 930 1730000000 152500 851 880 009
Q4-2004 350000000 930 1730000000 170495 1323 1238 019
Q1-2005 350000000 935 1642950000 162955 1937 1388 024
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Q2-2005 350000000 975 1858650000 155385 2758 2130 040
Q3-2005 350000000 1230 1772230000 253277 3155 2478 022
Q4-2005 350000000 1020 1858740000 171126 2875 2416 011
Q1-2006 350000000 1090 1990160000 182484 2817 2526 032
Q2-2006 350000000 1200 2102280000 209772 2333 2286 038
Q3-2006 350000000 1100 2175830000 167417 2216 2415 031
Q4-2006 350000000 1130 2088350000 186665 2277 2399 010
Q1-2007 350000000 1090 2250610000 156439 2324 2333 036
Q2-2007 350000000 1680 2278150000 360185 2405 2279 039
Q3-2007 350000000 1830 1761370000 464363 2279 2013 022
Q4-2007 350000000 1810 2253690000 408131 2242 2085 010
Q1-2008 350000000 1890 2443610000 417139 2406 2161 047
Q2-2008 350000000 1880 2496230000 408377 2248 2038 035
Q3-2008 350000000 945 2539250000 76825 2854 2254 042
PTT Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 1241052 1948 25492991 -3726117
Q1-2004 1359023 -736 27139776 3357089
Q2-2004 1546216 038 29548676 1435326
Q3-2004 1728192 056 35408844 1528303
Q4-2004 2069015 2007 36007485 -5157635
Q1-2005 1979412 080 37700794 1678238
Q2-2005 2021361 -162 38190186 2638911
Q3-2005 2584373 447 42843011 667703
Q4-2005 2030420 -257 50314206 3325487
Q1-2006 2857614 160 53055505 2007749
Q2-2006 3414841 -702 52214439 7078204
Q3-2006 2772555 -010 52791625 2824529
Q4-2006 2211084 -119 58561235 2909426
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101
Q1-2007 2597523 -091 62150438 3163333
Q2-2007 2915314 1151 65714609 -4645936
Q3-2007 2995119 612 66914816 -1102811
Q4-2007 3086914 -060 65323489 3476573
Q1-2008 3006564 -647 67384545 7368619
Q2-2008 3413170 -713 69848224 8394228
Q3-2008 2880676 -2676 70648006 21786227
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 2797245725 18500 128929190000 38856127 2147 4073 409
Q1-2004 2797245725 14000 273159180000 11845522 2031 3768 439
Q2-2004 2797245725 15400 147989760000 28278608 2296 4400 503
Q3-2004 2797245726 16900 163700780000 30903375 2254 4376 565
Q4-2004 2797245726 17300 184914960000 29900855 2359 4530 733
Q1-2005 2797245726 19300 211965260000 32790316 2489 4839 929
Q2-2005 2857245725 21800 211696420000 40682315 2636 5066 656
Q3-2005 2857245725 24400 237452160000 45483580 2501 4962 859
Q4-2005 2857245725 22600 278432930000 36278460 2165 4328 613
Q1-2006 2857245725 23400 306429300000 35748620 2315 3742 848
Q2-2006 2857245725 22600 311822200000 33391533 2661 4288 1132
Q3-2006 2857245725 21600 324644690000 29252039 2515 3983 869
Q4-2006 2857245725 21000 354322360000 24569924 2295 3673 554
Q1-2007 2857245725 20800 378067870000 21623924 2106 3332 805
Q2-2007 2857245725 27000 391235990000 38022036 1945 3052 937
Q3-2007 2857245725 33600 406986190000 55304837 1905 2933 872
Q4-2007 2857245725 37600 398651520000 55304837 2013 3012 868
Q1-2008 2857245725 31600 431102070000 47178758 2014 2883 927
Q2-2008 2857245725 30200 447208240000 41567997 1994 2892 1060
Q3-2008 2857245725 22800 450652810000 20079922 1926 2658 634
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102
PTTEP Time EBIT(1-T) WACC IC EVA (Million Baht)
Q4-2003 307669 1825 8332630 -1213266
Q1-2004 410757 -739 8937546 1071307
Q2-2004 438342 099 8899320 350461
Q3-2004 532358 149 9355975 392504
Q4-2004 618376 2279 9649925 -1580819
Q1-2005 547139 136 10045357 410351
Q2-2005 638132 016 10105670 622051
Q3-2005 876075 492 10766122 346602
Q4-2005 859692 -131 10679078 999153
Q1-2006 941739 199 11389748 715270
Q2-2006 920802 -663 11478137 1682315
Q3-2006 877675 -063 10822289 946060 Q4-2006 814798 -110 11902896 945405 Q1-2007 865878 032 12417437 825525 Q2-2007 902840 1183 14341123 -794329 Q3-2007 888359 750 14588274 -205974 Q4-2007 1002790 -147 15558253 1232251 Q1-2008 1104209 -655 15797903 2139329 Q2-2008 1576750 -720 17200590 2815171 Q3-2008 1665272 -2621 17644425 6289306
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 664400000 26400 45674130000 12972747 2455 2842 305
Q1-2004 664400000 26000 83326290000 8941771 2349 2849 518
Q2-2004 664400000 26800 44148500000 13391070 2483 2850 502
Q3-2004 664400000 29800 52254040000 14573716 2460 2659 630
Q4-2004 664400000 29000 57098940000 13557706 2794 3088 781
Q1-2005 664400000 29800 61313270000 13667793 2767 3036 781
Q2-2005 664400000 38400 61159500000 19397010 3144 3471 651
Q3-2005 664400000 46800 64902390000 24603681 3239 3759 839
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Q4-2005 664400000 47200 71697320000 24189948 3270 3686 1041
Q1-2006 664400000 55200 79216790000 28753201 3460 3888 1197
Q2-2006 3322000000 10600 81138580000 27099342 3937 4092 222
Q3-2006 3322000000 10600 82585900000 26954610 3654 3898 208
Q4-2006 3322000000 9650 88524450000 23204855 3373 3501 186
Q1-2007 3322000000 9000 90163520000 20881648 3033 3186 206
Q2-2007 3322000000 10800 97216870000 26155913 3092 3012 218
Q3-2007 3322000000 13600 99323230000 35246877 3073 2979 214
Q4-2007 3322000000 16400 106786820000 43802118 3006 2914 227
Q1-2008 3322000000 15100 109949410000 39167259 2978 3057 270
Q2-2008 3322000000 19300 123122070000 51802393 3427 3307 394
Q3-2008 3322000000 12700 127172160000 29472184 3909 3771 393
RATCH
Time EBIT(1-T) WACC IC EVA (Million
Baht)
Q4-2003 112296 1007 6050050 -496760
Q1-2004 129981 -485 6079036 424879
Q2-2004 129009 108 6011443 64153
Q3-2004 154874 114 5988292 86446
Q4-2004 128496 919 6058646 -428170
Q1-2005 173506 146 6196884 82950
Q2-2005 150978 077 6149705 103727
Q3-2005 127471 301 6106790 -56503
Q4-2005 63596 288 6099732 -111935
Q1-2006 159398 262 6222691 -3329
Q2-2006 128969 -120 6149288 202761
Q3-2006 152978 154 6100789 58923
Q4-2006 92397 036 6109544 70375
Q1-2007 171122 036 6226287 108032
Q2-2007 175393 101 6193161 -332987
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Q3-2007 63713 821 6012851 -218370
Q4-2007 100140 469 6029422 -14985
Q1-2008 143817 123 6347647 65537
Q2-2008 112345 -363 6176346 336537
Q3-2008 169569 -323 6164694 368802
Time of common
shares closing price
shareholders equities
MVA (Million Baht)
ROA ()
ROE ()
EPS ()
Q4-2003 1450000000 4900 24735980000 4631402 1058 2293 088
Q1-2004 1450000000 3575 64050980000 -1221348 1009 2128 106
Q2-2004 1450000000 3700 37426440000 1622356 1065 2402 105
Q3-2004 1450000000 3750 26940460000 2743454 1084 2473 131
Q4-2004 1450000000 3800 28468010000 2663199 1129 2439 105
Q1-2005 1450000000 4000 30617150000 2738285 1228 2497 148
Q2-2005 1450000000 4050 30877490000 2784751 1267 2597 128
Q3-2005 1450000000 3950 30909130000 2636587 1199 2425 102
Q4-2005 1450000000 4100 31489370000 2796063 1056 2024 040
Q1-2006 1450000000 3975 33423160000 2421434 1038 1827 133
Q2-2006 1450000000 3475 33432130000 1695537 998 1696 110
Q3-2006 1450000000 3500 33777500000 1697250 1033 1783 124
Q4-2006 1450000000 4300 34695400000 1697250 1074 1845 063
Q1-2007 1450000000 4550 36744140000 2765460 1096 1773 141
Q2-2007 1450000000 4650 37289610000 2923086 1195 1952 148
Q3-2007 1450000000 4725 36400300000 3013539 1013 1615 039
Q4-2007 1450000000 4575 37479800000 2768701 1024 1615 074
Q1-2008 1450000000 4625 39375490000 2885770 957 1441 118
Q2-2008 1450000000 4200 39046200000 2185380 847 1208 087
Q3-2008 1450000000 3500 39526640000 1122336 1082 1613 143
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105
BIOGRAPHY Miss Peng Fang-Fang a native of Taipei city Taiwan attended the Chinese
Culture University where she received a bachelor of the arts in French language and
literature Afterward she worked in the Mandarin Airlines where she got the chance to
discover the world and enlarged the vision as well Later on she decided to study in master
degree Fang-Fang knew that it would put a lot of efforts to complete it but she also
understood it was now or never
Always the one to try something new Fang-Fang has been learned many things in a
shape During her time in Thailand she has studied Thai cuisine and language and now
she is earning a master in business administration through University of Thai Chamber of
Commence in 2009 She strongly believes that studying in Thailand is one of the most life-
enriching experiences
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APPENDICES
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The Relationship between Economic Value Added and Stock Price Returns in Thai Energy Sector
Peng Fang-Fang
Graduate School Department of International Business Business Administration University of the Thai Chamber of Commerce
TEL (886)22945-8979 Email lilias2001hotmailcom
Keywords Economic Value Added (EVA) Market Value Added (MVA) Energy Sector Thailand
ABSTRACT
An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue Until now there are only few EVA relevant studies in Thailand Thus this is an opportunity to start a research in this field The researcher intends to investigate if EVA can be suitable for applying to the Thai energy sector which is mostly affected the performance of the Stock Exchange of Thailand (SET) and to investigate if EVA can better affect the operational performance than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock price returns The evidence of this research shows that EVA is not suitable for applying to the Thai energy sector even EVA has relationship with MVA but it can not affect MVA by regression analysis Moreover EPS has the most significant relevance Thus EVA is not a superior performance measure in explaining market price returns compared with traditional performance index of the Thai energy sector However the researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures instant of replacing anyone 1 Introduction
As a staring point developer and promoter US-based consultants Stern Stewart amp Co argued that ldquoearnings earnings per share and earning growth are misleading
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2
measures of corporation performance Earnings are diminished by bookkeeping entries that have nothing to do with recurring cash flow and are charged with such value- building capital outlay as RampD all in an attempt to placate lendersrsquo desire to assess liquidation value The best practical periodic performance measure is economic value added (EVA)rdquo (Stewart 1991) It widespread as the financial management and incentive compensation system began with Fortune Magazine proclaimed EVA as rdquotodayrsquos hottest financial idea and getting hotterrdquo ldquoThe real key to creating wealthrdquo ldquoA new way to find bargainsrdquo ldquoAmericarsquos greatest wealth creatorsrdquo and ldquoA new way to value the marketrdquo The management guru Peter Drucker (1993) described it as ldquoa vital measure of total factor productivityrdquo Originally in the United States EVA has been literally world wildly adopted by hundreds of the leading firms The concept of EVA is a modified computation of residual income with a series of accounting adjustments to how one calculates income and capital It is the net operation minus an appropriate charge for the ldquoopportunity costrdquo which means the cost of capital by Stewart in an enterprise or projects It is the way to show what value was made from what capital was used Managers can also used EVA as a diagnostic likely tool to show which one of the departments needs more work to increase a firmrsquos value for the next period (Maumlkelaumlinen amp Roztocki 1998) An emerging literature of analyze whether EVA is highly associated with stock returns than traditional performance measures has addressed the empirical issue The research objectives are (1) to investigate if EVA can be suitable for applying to the Thai energy sector (2) to investigate if EVA can better affect the operational performance of Thai energy sector than the traditional performance index (including EPS ROA and ROE) in explaining Market Value Added (MVA) thereby stock returns
2 Literature Review
21 Value Based Management A managerrsquos primary goal is to maximize the value of his company but these traditional accounting-based measures can not measure the creation of shareholdersrsquo wealth and also have their own back draws (Stewart 1999)
Based on traditional business models incentive both encourage rampant short-term vision of managers and lead to other forms of dysfunctional behaviors This accounting system under pricing of capital has also driven broad capital misallocation and mismanagement Many managers recognized this problem Consequentially in the
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3
equity boom of the eighties many American companies are enthusiastic about the creation of ldquoshareholder-valuerdquo (Johnson et al 1985 Rappaport 1986 Stewart 1991 Ehrbar 1998 Stern Stewart 2000) 22 Market Value Added (MVA)
Generally shareholder value of the market value of a firm has expressed by its share price But Stern and Stewart suggested a new measure to directly reflect the creation of shareholder value instead of simply maximizing market value as it does not concern about the money that investors have brought up To make up for this MVA has clearly showed the difference between current market value of all capital and total capital supplied by creditors and shareholders over the actual time of the company (Firer 1995 Reilly and Brown 2003)
23 Economic Value Added (EVA) The origins of EVA can be traced to Hamilton (1777) who explained that for firm
earnings and wealth creation they must earn more than the cost of their debt and equity Marshallrsquos Principles of Economic (1890) has focused on adjustments to accounting earnings to reflect the opportunity cost of capital since the unadjusted measure can be a misleading indicator of performance in both practical and theory Later Marshall stated that ldquothe gross earnings of the true profits of his business and deducting interest on his capitalrdquo Economists have been familiar with the lsquoresidual incomersquo framework for years but in the other hand businesses have only recently started to switch from managing for earnings to managing for seeking value EVA has facilitated this process as ldquoa practical and highly flexible refinement of economistsrsquo concept of lsquoresidual incomersquo- the value that is left over after a companyrsquos stockholders have been adequately compensatedrdquo by providing operating managers practical use (Stern Stewart and Chew 1995)
24 Related Research Uyemura Kantor and Pettit (1996) in analysis of 100 largest American
commercial banks listed on Stern Steward amp Co over the period of 1986 to 1996 The study demonstrated that EVA has a higher correlation with MVA than ROA ROE Net income and EPS
Milunovich and Tsuei (1996) determined EVA has a closely connected with stock returns in American IT industry over the period from 1990 to 1995 comparing with
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the traditional financial performance tool by using regression method EVA is relatively higher relevance than EPS growth ROE Free cash growth and FCF They point out that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when others fail
Chen and Dodd (1997) gathered 566 American Corporations from the year 1992 Stern Stewart 1000 database as a starting point and added some supplementary data for the ten years from 1983 to 1992 They stated that ldquonot a single EVA measure (annualized EVA return average EVA per share change in standardized EVA and average return on capital) was able to account for more than 26 of the variation in stock returnsrdquo They also found that residual income in generally yield the same
Kramer and Pushner (1997) stated in all cases NOPAT explained more of the total variation in market value than EVA did by using the Stern Stewart 1000 companies for the period between 1982 and 1992 They also stated there was no clearly evidence to support EVA is the best internal measure of shareholder value creation and suggested that compensation system should rather be tied to profits than to EVA
Clinton and Chen (1998) compares share prices and returns on residual cash flow EVA and other traditional performance measures and suggested that companies should consider using residual cash flow as an alternative while using EVA
The study of Li Wu-Lung (2000) provided empirical evidence on EBEI CFO RI and EVA He stated that EBEI can have more relative information content and incremental information content when both in explaining contemporaneous stock returns and forecasting future stock returns
Shu Nai-Li (2001) examined the EVA of eight sample listed Taiwan companies in semiconductor sector over the period 1996 to 2000 has a closely relationship with MVA Furthermore EVA can better reflect operational performance than EPS ROA and ROE in regressions
Eljelly and Alghurair (2001) studied whether EVA is associated with MVA compared with traditional performance measures such as EPS cash flow and ROE in Saudi Arabia across all sectors They found that EPS is dominating performance measure with respect to its association with MVA They also recommend that investors in Saudi market should consider traditional performance measures as primary tool to evaluate firmsrsquo value
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Lee Wei-Chiau et al (2005) stated that EVA can be applied to the Taiwan Semiconductor Company Manufacturing Limited (TSCM) as the investment measure tool and evaluation stock performance measure The results showed EVA has significant positive relationship with MVA with the explanatory power at 328
Nontapat (2005) examined Thai Airways over the period 2000 to 2004 by using regression method to find the relationship between EVA and MVA The results showed that EVA can not reflect current MVA number
Terry and Baffoe (2008) studied two Britainrsquos banks the HSBC and Barclays plcand and their empirical result showed that both banks indicate their ability to take cost advantage and increase base for profit to maximization and value creation for shareholders But they stated that EVA has superior relationship with market returns in Baclays while ROA provides more explanatory power for HSBC
Liu Chun-Hao (2008) studied listed companies in Taiwan IC design industry over the period from 2005 to 2007 and found that EVA has more significant correlation with MVA than EPS ROA and ROE And EPS has stronger explanatory power in explaining stock returns by using panel data regressions 3 Research Methodology 31 Research Design
The researcher adopts the concept of Uyemura Kantor and Pettit (1996) by using quantitative method Base on literature review and main concept of relationship between EVA compared with traditional measures and MVA which can be divided into two parts
- Independent variable EVA EPS ROA ROE - Dependent variable MVA 32 Population Assuming that the equity markets are semi-strong form efficient there are eight
sample listed companies in energy sector on the SET are employed BAFS BANPU EGCO IRPC LANNA PTT PTTEP and RATCH
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33 Data Collection This research period covers 20 quarters between 2003 Q4 and 2008 Q3 The
secondary data is collected from these websites Thai bond Association and Stock Exchange of Thailand 1 EPS = Net Income Common Shares Outstanding
2 ROA = Net Income Average Total Assets 3 ROE = Net Income Average Common Stockholderrsquos Equity
4 EVA = NOPAT - WACC x Invest Capital 1 NOPAT = EBIT x (1-T)
2 Invested Capital = (Total current asset - (Total current liabilities - Short-term Loan)) + Total Non-Current Assets
3 WACC = R debt (1-T) (DD+E) + R equity (ED+E) (1) R debt = Return on debt can be calculated as Interest ExpenseLong-term debt (2) R equity = Cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) with the formulation as follows R = Rf + β x (Rm ndash Rf)
(a) Rf is the daily rate of Thai Government 22 years Bond (b) Rm is the market daily return on SET
(c) Rm ndash Rf is the average value of expected return on market and risk free rate in research period also known as the market risk premium
(d) β is called that ldquoSystematic Riskrdquo is studied based on linear regression and securities in energy sector is to find out market return and return on the security respectively Market return is calculated as
Rm = ((Closing pricet ndashClosing pricet-1) Closing Pricet-1)) x100 Return on the security is calculated as Ri = ((Closing pricet ndashClosing pricet-1+Dividendt) Closing Pricet-1)) x100 (3) D is the total liabilities (4) E is the total equities (5) T is corporate tax rate 30
5 MVA = Market price x Number of common shares - Shareholders equities
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34 The Accounting Adjustments The basic accounting adjustment is to deduct the short-term non-interest bearing liabilities from other current assets of other assets called EVA balance sheet (Young and Orsquo Byrne 2001)
35 Hypotheses Hypotheses 1 EVA affects MVA in Thai energy sector Hypotheses 2 Traditional performance measures (EPS ROA and ROE) affect MVA in
Thai energy sector Hypotheses 3 EVA can better reflect MVA thereby stock returns than traditional
performance measures (EPS ROA and ROE) 36 Data Analysis
1 Descriptive Analysis to describe total characteristics of sample listed companies
2 Correlation Analysis to measure the association between two variables for indicating their directions and covariance and the R2 will be determinate
3 Regression Analysis to examine whether if independent variables affect dependent variable If significant is less than or equal to 05 those independent variables (EVA EPS ROA and ROE) will affect dependent variable (MVA)
4 Analysis Result and Concussion
41 Descriptive Analysis Table 1 and Table 2 show that the leading firms PTT and PTTEP show greater
value when compared with the industry average EVA and MVA numbers The financial performance of each company is positive during the empirical period expect IRPC which had an average negative EVA that means the firm may destroy market value when invested projects by both debt and stockholders 42 Correlation Analysis Table 3 shows that EPS has highest association with MAV at 645 much greater than EVA at 301 However all variables have positive relationship with MVA
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43 Regression Analysis 1) Analyze the innovation measure EVA
The total EVA samples positively affect MVA and the explanation power is 850 When examining each company the EVA of EGCO and RATCH have negative relationship with MVA while PTTEP has positive one as shown in Table 4 2) Analyze the traditional measures (EPS ROA and ROE)
Table 5 indicates that when only use EPS to examine the explanatory power is 413 And when plus in ROA it increases to 507 Three traditional accounting measuresrsquo explanatory power to MVA can be attended to 52 The results not only reject null hypothesis but also are viewed as evidence traditional accounting measures (EPS ROA and ROE) affect MVA in Thai energy sector 3) The results of all independent variables
When using total samples Table 6 provides the evidence that EVA can not better reflect MVA than other three traditional accounting-based measures Table 7 indicated that EVA is a dominant performance measure in market returns for only one company RATCH with the negative relationship 5 Conclusion and Suggestion
The evidence of this research shows that EVA is not be suitable for applying to the Thai energy sector the correlation of MVA depends on all variables show EPS has the most significant relevance then go to ROA ROE and finally is EVA EVA has relationship with MVA but can not affect MVA from regression analysis EVA is not a superior performance measure in explaining market price returns compared with traditional performance index (EPS ROA and ROE) in the Thai energy sector However Young and OrsquoByrne (2001) mentioned that EVA should never be thought of as a substitute for any other measure The researcher suggests that any managers shareholders and participants can use EVA as an assistant tool with traditional performance measures
There are some limitations of this research such as accounting adjustments and compensation system Due to hard to get data from published financial information it can not apply major items and may cause different EVA numbers Thus the empirical results have not made a conclusion in this field Perhaps the most at this point is that
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research must be continued In the short term further researchers can compare EVA with other popular accounting-based index
Some researchers stated that EVArsquos most powerful distinguishing feature is its fit to management compensation system Further researchers can make a comparison of whom use EVA modern excusive compensation plans against firms who only use traditional accounting-based incentives or study EVA and MAV as determinants of excusive compensation in one specific company
Acknowledgements
I would like to express my gratitude to the people who have played especially important role in the development of this research First of all let me pay my deepest acknowledgement to my supervisors Dr Kittiphun Khongsawatkiat and Dr Thassna Boonkwan for their valuable advice and recommendations The excellent research method course taught by Dr Phusit Wonglorsaichon helps me out Next I need to single out my key thinking partner Mr Weera Weerakhajornsak for his professional directions and generous contributions Also I acknowledge all committees Dr Phusit Wonglorsaichon Dr Pussadee Polsaram and Assoc Prof Sriaroon Resanond to turn this research into its final shape with their kindness critique Perhaps the most important is the courage from my parents Mr Peng Han-Qing and Mrs Nancy Pen whose comfort and support always keep me wrestling with all hard times Of course my appreciation goes to all my family and friends whose sharing ideas and comments are woven into the research I wish I could express my sincerely thanks for how they have enriched my life
References Al Ehrbar (1998)EVA the real key to creating wealth Wiley New York Chen S amp Dodd JL (1997) Economic Value Added (EVA) An Empirical
Examination a New Corporate Performance Measure Journal of Managerial Issues 9 3 318-333
Clinton BD amp Chen S (1998) Do New Performance Measures Measure Up Management Accounting 80 4 38ndash44
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Drucker P (1998) The Information Executives Truly Need to Know in Harvard Business Review on Measuring Corporate Performance Boston Harvard Business School Press
Eljelly Abuzar MA and Alghurair Khalid S (2001) Performance Measures and Wealth Creation in an Emerging Market The Case of Saudi Arabia International Journal of Commerce and Management Vol 11 Issue frac34 pp54-57
Esa Maumlkelaumlinen and N Roztocki (1998) Economic Value Added (EVA) for small business Retrieved March 22 2007 from httpwwwevanomicscomdownloadevasprespdf Firer C (1995) Investment Basics EVA the real key to creating valueInvestment
Analysts Journal summer 1995 No 40 pp57ndash59 GBennet Stewart III (1991)The Quest for Value A Guide for Senior Managers New
York Harper Business GBennett III Stewart (1999) ABC the Balanced Scorecard and EVA Stern Stewart
Europe ltd London Vol1 (2) pp1-5 Hamilton R (1777) An Introduction to Merchandize Edinburgh Isaac Tettey Isaac Takyi Baffoe (2008) Investigating Shareholdersrsquo Economic Value
Creation in the Banking Industry -The case of the HSBC and Barclays plc UK MBA program School of Management Bleking Institute of Technology from httpwwwbthsefoucuppsatsnsfallfd9cf014dc590017c12574bf007becfb$fileThesispdf
Joel Stern (July 2000) Value and People Management Corporate Finance no10435 Joel Stern G Bennett Stewart III and Donald H Chew Jr(1995)The EVA Financial
Management System Journal of Applied Corporate Finance 8 (2) 32-46 Johnson WB Natarajan A and Rappaport A (1985) Shareholder Returns and
Corporate Excellence Journal of Business Strategy pp52ndash62 Kramer JK and Peters JR (2001) An inter-industry analysis of Economic Value
Added as a proxy for Market Value Added Journal of Applied Finance pp41ndash49
Lee Wei-Chiau et al (Dec 2005) Study on the Economic Value Added Performance of TSMC Journal of Jen-Teh12838 P37-48
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ธ มหาว
ทยาลย
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Li Wu-Lung (2000) A study of performance measures and stock price returns Graduated School of Accounting National Taiwan University
Liu Chun-hao (2007) The relationship between EVA and MVA in IC design industry EMBA program Industrial economics National Central University Taiwan
Marshall Alfred (1890) Principles of Economics The MacMillian Press Ltd Milunovich Steven and Albert Tsuei (1996) EVA in the Computer Industry Journal of
Applied Corporate Finance 9 no1 Spring 104-115 Nontapat Duangmanee (2005) A study of the relationship between EVAreg and MVA
Kasetasnt University Rappaport A (1986) Creating Shareholder Value The Free Press New York Reilly FK and Brown KC (2003) Investment analysis portfolio management 7th
edition Thomson-South Western Cincinnati Shu Nai-Li (2001) The Relationship between Taiwan Semiconductor Industry and
Stock Price Returns EMBA program National Taiwan University of Science and Technology
Uyemura DG Kantor CC amp Petit JM (1996) EVA for Banks Value Creation Risk Management and Profitability Measurement Journal of Applied Corporate Finance 9 294-111
Young SDavid and Stephen FOrsquoByrne (2001) EVAreg and Value-Based Management ndash A Practical Guide to Implementation New York McGraw-Hill
Appendix
Table 1 Descriptive statistics matrix between 2006 Q4 and 2008 Q3
Variable Minimum Maximum Mean SD
MVA(Million Baht) -7414330 55304837 918546143 13846567201 EVA(Million Baht) -13667042 21786227 39891781 2597919193
EPS () -23 1197 28192 309496 ROA () 312 3937 174881 778683 ROE () 382 10038 272884 1728924
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Table 2 Comparison of average MVA and EVA
Company MVA (Million Baht) Company EVA (Million Baht)
PTT 34853179 PTT 2950372
PTTEP 24891792 PTTEP 899434 BANPU 5104087 BANPU 99459 IRPC 5101639 RATCH 15504 RATCH 2328525 EGCO 13486 EGCO 795990 LANNA 6748 LANNA 227649 BAFS 1135 BAFS 180831 IRPC -794796 AVERAGE 918546143 AVERAGE 39891781
Table 3 Correlation Analysis
Variable MVA EVA EPS ROA ROE
MVA 1
(Sig)
EVA 301() 1
(Sig) 000
EPS 645() 317() 1
(Sig) 000 000
ROA 573() 210() 459() 1
(Sig) 000 008 000
ROE 330() 105 189() 342() 1
(Sig) 000 187 017 000
Note a) n = 160 b) Significant level at the 01 level (2-tailed) Significant level at the 05 level (2-tailed)
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Table 4 Regression matrix -EVA
Unstandardized Coefficients
(Beta) Company Code Sig Adjusted R2
Constant EVA
t-value
Total Samples 00 850 85456 1604 3967
EGCO 00 5670 83356 -2786 -5091
RATCH 00 5100 221171 -3351 -4554
PTTEP 046 1600 238047 3085 2147
Note a) Unstandardized Coefficients show the positivenegative relations
b) t-value indicates EVA contributes to MVA Table 5 Regression matrix ndashEPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 00 5200 5456061 4745
Total sample
ROE 9330395
1073495 2291
Note Significant level at the 005 R=727 R2=529 F=58460
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Table 6 Regression matrix ndashEVA EPS ROA and ROE
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
EPS 21441742 7745 ROA 5456061 4745 ROE
00
5200 93304 1073495 2291
Total 8 company
EVA 136 - - - - Note Significant level at the 05 R=727 R2=529 F=58460
Table 7 Regression matrix between all variables for each company
Unstandardized Coefficients
(Beta) Company
Code Variable Sig
Adjusted R2
Constant Std Error
t-value
BAFS ROE 013 259 -204926 188124 2761 BANPU EPS 001 455 1331347 9798842 411
EVA -2683 -5425 EGCO
ROA 00 567 -11005205
1298813 2283 PTT EPS 041 168 157766409 2508091 2198
ROA 3752215 4495 PTTEP
ROE 001 518 5394636
-293536 -3292 RATCH EVA 00 51 23804717 -3351 -4554
Note All variables are excluded in these two companies IRPC and LANNA
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