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EVA and shareholder value creation: an empirical study
Wajeeh Elali
Westminster Business School
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EVA and Shareholder Value Creation:
An Empirical Study
Wajeeh Elali
A thesis submitted in partial fulfilment of the
University
Westminster
the
of
of
requirements
for the degreeof Doctor of Philosophy
September2007
DEDICATION
This thesisis dedicatedto my belovedfather
who supported, inspired, and encouraged me to pursue my education to my
fullest abilities.
He was always my greatfriend and mentor!
ii
ACKNOWLEDGEMENTS
First and foremost, I must acknowledge and thank my supervisory team to whom
deeply
indebted.
Shubber
I
Kadom
Dr.
Nic
Dr.
to
am particularly grateful
and
am
Zafiris, not only for their guidance and expertise, but also for their assistance,
for
facilitated
this
my research work
understanding, and accessibility, which greatly
thesis. Their patience and trust in my being able to accomplish this task, despite my often
daunting work load, were an encouraging and value added factor, to say the least. I truly
benefited from them individually and enjoyed working with them over the last five years.
I have been truly fortunate to have them as my supervisors as they are the kind of people
that one would like to cultivate as friends as well as mentors.
I wish also to extend my thanks and sincere appreciation to the Board of
Examiners: Professor David Weir, Professor Ben Nowman, and Dr. Peter Urwin
(Chairman). Their constructive critiques and insightful recommendationswere invaluable
in completing this project.
I would further like to acknowledge and express my thanks to Mike Fisher (The
University Registrar), Patricia King-Edwards, Cristian Popescu, Eric Chang for their
cooperation and professional assistance.Finally, I owe a special acknowledgement and
thanks to my sister Dr. Hanan Ismail, my brother in-law Dr. Khalil Muhdi, and my niece
Noor for making their home available for my stays in London. Their encouragementand
hospitality gave me peace of mind during the various stagesof my thesis.
ABSTRACT
In recent years, a variant of residual income often called Economic Value Added
(EVA)' or Economic Income (EI) has become a popular concern in academia and
business communities. This study investigates the general hypothesis that EVA is more
highly associated with
firm
shareholder wealth and
values than are traditional
Two
measures.
commonly used value-based performance metrics namely,
performance
Total ShareholderReturn (TSR) and Tobin's Q are also consideredto highlight the valuein
EVA
these
vis-a-vis
measures predicting shareholderwealth.
relevanceof
Using a sample of panel data of around 12,000 firm-year observations taken from
the Stem Stewart 1000 EVA/MVA databaseand the DATASTREAM file over the period
1991-2002, this study finds compelling evidence that shareholder value is a function of
EVA. This study also provides evidence consistent with the notion that EVA outperforms
in
Valuetraditional
measures
explaining
shareholder
wealth.
other
performance
be
highly
EVA
to
tests
reveal
more
associatedwith shareholder wealth than
relevance
TSR and Tobin's Q. The incremental tests also suggest that EVA possessesthe largest
information
Q.
TSR
Tobin's
These results
(or
and
explanatory power
usefulness) over
further
by
EVA
the
support the
claims made
proponents and
conclusively support
for
internal
EVA
the
metric
and external performance.
potential usefulnessof
' EconomicValue Added or EVA is a relatively new measureof corporateperformancedevelopedand
trademarkedin the late 1980sby the US-basedbusinessconsultantsStern Stewartand Co. (hereafter
Stewart).
Stem
to
as
referred
iv
TABLE OF CONTENTS
DEDICATION
ACKNOWLEDGEMENTS
ABSTRACT
iv
LIST OF FIGURES
vii
LIST OF TABLES
viii
CHAPTER 1: INTRODUCTION
I
1.1 Objective of the Study
3
1.2 ResearchQuestions and Hypotheses
4
1.3 Outline of Thesis
5
1.4 Concluding Remarks
5
CHAPTER 2: BACKGROUND AND LITERATURE REVIEW
2.1 Introduction
7
2.2 ShareholderValue Approach
7
2.3 Value-based Metrics
19
2.3.1 Economic Value Added (EVA)
20
2.3.2 Market Value Added (MVA)
35
2.3.3 Tobin's Q
39
2.3.4 Total ShareholderReturn JSR)
43
2.3.5 Cash Flow Return on Investment (CFROI)
45
2.3.6 The Balanced Scorecard(BSC)
50
2.4 The Association between EVA & ShareholderValue
53
2.5 Concluding Remarks
61
CHAPTER 3: RESEARCH ISSUES and HYPOTHESES
3.1 Introduction
63
3.2 ResearchIssues
64
3.3 ResearchHypotheses
65
3.3.1 Hypothesis One
65
V
3.3.2 Hypothesis Two
66
3.3.3 Hypothesis Three
67
3.4 Concluding Remarks
68
CHAPTER 4: RESEARCH DESIGN & METHODOLOGY
4.1 Introduction
69
4.2 Data Sources and Statistical Techniques
69
4.3 Model Specification
72
4.4 ResearchVariables
74
4.4.1 Dependent Variable
74
4.4.2 Independent Variables
75
4.5 Concluding Remarks
79
CHAPTER 5: DATA ANALYSIS AND PRESENTATION OF RESULTS
5.1 Introduction
80
5.2 Descriptive Statistics
81
5.3 Test of Hypothesis
82
5.3.1 Hypothesis One
82
5.3.2 Hypothesis Two
85
5.3.3 Hypothesis Three
91
5.4 Concluding Remarks
99
CHAPTER 6: CONCLUSIONS, LIMITATIONS, AND FUTURE RESEARCH 101
REFFERENCES
107
APPENDICES
116
Appendix A: Figures
117
Appendix B: Tables
121
Appendix C: The 2002 Stem Stewart Performance 1000
165
vi
LIST OF FIGURES
Figure One:
The Shareholder Value Analysis Network
117
Figure Two:
A Typical Financial Management System (Fuzzy Finance)
118
Figure Three: EVA: A Simplified and FocusedFinancial Management System
119
Figure Four:
120
Balanced Scorecard(Casual Chain)
vii
LIST OF TABLES
Table 2.1
How Performance Measures"Explain" Changesin MVA
121
Table 4.1
Calculation of NOPAT from Financial StatementData
122
Table 4.2
Calculation of Capital Using Accounting Financial Statements
123
Table 5.1
Descriptive Statistics of Variables Employed in the
RegressionModels
124
Table 5.2
Correlation between Variables
125
Table 5.3
Hypothesis (1): Univariate RegressionResults
126
Table 5.4
Hypothesis (2): Multivariate RegressionResults
128
Table 5.5
Fixed vs. Random Effects (Equation 5.3)
130
Table 5.6
Statistical Results of Step One of Hypothesis (2) Testing
133
Table 5.7
Statistical Results of Step Two of Hypothesis (2) Testing
136
Table 5.8
Hypothesis (2): Relative & Incremental Value-relevance Tests
139
Table 5.9
Hypothesis (3): Multivariate RegressionResults
140
Table 5.10
Fixed vs. Random Effects (Equation 5.13)
143
Table 5.11
Statistical Results of Step One of Hypothesis (3) Testing
148
Table 5.12
Statistical Results of Step Two of Hypothesis (3) Testing
153
Table 5.13
Hypothesis (3): Relative Value-RelevanceTest
163
Table 5.14
Hypothesis (3): Incremental Value-RelevanceTest
164
viii
Chapter 1
INTRODUCTION
The link between performance measures and shareholder value creation has
becomean issueof considerableacademicandpractitioner interest.Academicresearchers,
business
have
in
heated
debate in the
analysts
engaged a rather
corporate executives, and
last decade or so as to whether the new value-based performance metrics have a higher
do
their
than
returns
other traditional accounting-based
correlation with stock values and
2 Economic Value Added (or EVA), the
income
residual
remaining after all
measures.
costs, including the opportunity cost of the equity capital employed, is among the few
have
been
that
performance metrics
widely adopted and are claimed to approximate
is
by
its
being
In
EVA
effect,
shareholder returns.
promoted
proponents as
superior to
determinant
traditional
and predictor of
and non-traditional performance metrics as a
other
(Stewart,
1991;
Ehrbar,
1998).
corporate successand value creation
Nevertheless, despite the growing amount of literature that has attempted to
little
far
been
has
EVA's
the
superiority;
empirical research
so
evaluate
claims made about
done to support the above assertions (e.g., Ittner & Larcker, 1998; Lehn and Makhija,
1997; Lovata and Costigan, 2002; Yook, 1999; Feltham et al., 2004). Moreover, the
limited studies that have appeared in the literature have produced somewhat conflicting
(1997);
Fernandez
(2002);
Chen
Dodd
(1997);
instance,
Biddle
For
and
et al.
conclusions.
2 See, for example, Ittner and Larcker (1998 and 2001); Black et al. (2001); Arnold and Davies (2000);
Garvey and Milbourn (2000); Myers (1996); Chen and Dodd (1997); Biddle et al. (1997); Worthington and
West (2004); Erasmusand Lambrechts(2006); Rajan (2000); Feltham et al. (2004); Fergusonet al. (2005);
Grant
(2000).
Fabozzi
and
and
Paulo (2003); Palliam (2006); and Stark and Thomas (1998) have mostly not been
supportive of these claims. On the other hand, Grant (1996,2003); Lehn and Makhija
(1996,1997); Zafiris and Bayldon (1999); Young and O'Byrne (2001); Worthington and
West (2004); Tully (1993,1998); Ferguson et al. (2005); Erasmus and Lambrechts (2006);
and Feltharn et al. (2004) have made contributions that favour EVA on theoretical and/or
empirical grounds.
The inconclusive and mixed results of these studies raise an important question. Is
EVA really superior to other alternative performance measures or is it merely a fad
by
firm?
This conflicting evidence thus necessitates
promoted
a management consultancy
the conducting of further studies that may provide better insight and understanding into
this complex, yet crucial relationship between shareholder wealth creation and EVA. To
further this idea, Lovata and Costigan (2002, p.226) stated, "Economic Value Added is a
its
to
the
that
much
additional
research
support or contest
claims of
concept
requires
developers." Likewise, Feltham et al. (2004, p. 83) suggests that the debate should be
has
EVA
greater relevancethan other performance measures.
reopenedregarding whether
On the other hand, there has been an emphasis in previous empirical work in this
limited
data.
For
set of panel
example,
area on either a cross-section of companiesor on a
Bao and Bao (1998) only employed a cross-sectionof 166 firms over the period of 199293; whereas, Grant (2003) focused on only
50 of the largest U. S. wealth
data"
Clearly,
"panel
2000.
an examination of extended
creators/destroyers at year-end
EVA
the
of
as an
usefulness
would certainly permit greater empirical certainty on
2
advanced measure of corporate performance and value creation. Thus, the scope of this
study must out of necessity go further.
This study, therefore, explores the suitability of using EVA as a measure of
corporate success as well as providing additional empirical evidence on the use of EVA.
Specifically, the statistical association between EVA and the creation of shareholders
has
been
wealth
empirically examined and highlighted. The efficiency of two alternative
value-basedperformance measures-namely, Total ShareholderReturn (TSR) and Tobin's
was also considered vis-a-vis EVA to assertor refute its superiority. In this chapter, the
overall objectives of the thesis are highlighted, and are followed by a brief discussion of
the three research questions that form the foundation of this study and so comprise the
basis for its hypotheses.
1.1 Objectives of the Study
The primary objective of this thesis is to empirically test the assertion that EVA is
highly associatedwith Market Value Added (or MVA). Market Value Added is defined as
the difference between the market value of the firm (including equity and debt) and the
total capital invested in the firrn (Young and O'Byrne, 2001, p.29). It is a measure of
indicator
be
best
is
to
the
considered
of shareholder value
external performance, which
does
fully
determinants
but
The
MVA,
though,
to
the
study
not seek,
explain
creation.
of
for
how
in
EVA
MVA,
to
acts as a genuine explanatory variable
well
order to
only
show
justify its usefulness for performance measurement,shareholder value creation, executive
financial
reporting.
compensation,and
3
Thus, the objectives of this study are three-fold. First, to
ascertain whether there is
a significant statistical association between EVA and shareholder wealth. Second, to
examine which value-based performance metric (EVA, TSR, or Tobin's Q) has a greater
association with market value added (MVA). Finally, to attempt to uncover whether the
components unique to EVA-namely,
net operating profit after tax (NOPAT), return on
invested capital (ROIC), profitability index (PI), Capital Growth (CG), cost of capital
(WACC), and total invested capital (TIC) -- help in explaining contemporaneousMVA
beyond that explained by traditional value-basedperformance measures.
1.2 Research Questions and Hypotheses
The hypothesesto be tested are derived from the notion that EVA is generally more
highly associated with shareholder returns and firm value than are other alternative
performance measures.Thus, this study posesthe following questions:
e
Does a statistical relationship between EVA and shareholderwealth in the
sense of contemporaneousMarket Value Added (MVA) exist, and if it
does, how much of the variation (i. e., change) of the shareholder value
be
by
EVA?
can explained
*
Does EVA dominate other commonly-used value-based measures in
explaining MVA?
9
Do components unique to EVA help to explain contemporaneousMVA
beyond that explained by traditional value-basedperformance measures?
4
These three questions form the foundation of this study and consequently comprise
the basis for its hypotheses.While the first question explores the direction and the strength
of the relationship between EVA and MVA; the second and third one's investigate the
EVA
efficiency of
vis-a-vis other alternative performance metrics in predicting
shareholdervalue.
1.3 Outline of Thesis
To addressthese researchquestions,this study is organized as follows:
In Chapter 2, the relevant literature on value-basedperformance metrics and shareholder
is
discussed.
Chapter 3 presents the empirical research
reviewed and
value creation
hypotheses.Chapter 4 describes the population and data sourcesas well as presenting the
design
for
hypotheses.
Chapter
In
5, the results of a
testing
the
and methodologies
research
investigation
comprehensive statistical
are presentedfor each hypothesis and discussedin
detail. Finally, chapter 6 summarizesthe statistical results and discussesadditional aspects
future
for
this
research.
of
study
1.4 Concluding Remarks
Over the last two decadesor so, there has been a growing concern among business
traditional
that
accounting measuresof
managers
professional
and
analysts, academics,
for
decisions
In
longer
the
purpose
of
strategic
and
control.
appropriate
performance are no
the ongoing search for more adequate performance measures that show some link to
5
shareholdervalue, a number of alternativevalue-basedmetrics have been developedand
by
their respective advocates. The EVA, which is a residual income metric that
promoted
subtracts the cost of capital from the operating profits generatedin the business,seemsto
have emerged as a real improvement over the traditional accounting measures.This study
is
EVA
the
that
assertion
explores
a superior measureof performance and value creation.
In the following chapters, this issue will be thoroughly investigated and empirically
examined.
6
Chapter 2
BACKGROUND
AND LITERATURE
REVIEW
2.1 Introduction
The association between alternative performance measures and firm value has
deal
attracted a great
of academic interest for a long period of time. Several explanations
and predictions regarding this relationship have been raised in both the economic and
literature.
The central topic addressedin this chapter involves how the value
accounting
creation process of the firm. is reflected in alternative value-based performance metrics.
The purpose of this chapter is to provide the basic theoretical and empirical foundation for
the thesis as well as give a detailed review of six of the most widely used and discussed
in
business
the
value-basedperformance metrics
world and academic literature - that is,
Economic Value Added (EVA); Market Value Added (MVA); Cash Flow Return on
Investment (CFROI); Market-to-Book Value Ratio (MBV) better known as Tobin's
Total Shareholder Return (TSR); and the Balanced Scorecard (BSC). The specific
between
these performance metrics and shareholder value creation will also
relationships
be discussedand highlighted. Concluding remarks are provided at the end of the chapter.
2.2 Shareholder Value Approach
Over the last decade or so and in particular globalization, de-regulation, trade
liberalization, technological changes,transparencyor fuller disclosure of activities, and the
information revolution including the internet, as well as the increasing sophistication of the
7
financial markets have become the dominant forces behind the transformation
of
corporations and the climate in which they operate. Companies across the globe are now
under unprecedentedpressureto adapt to this new climate and to perform consistently well
in all markets, in which they compete
labour
the
the
product
market,
market, and
-namely,
the capital market. Otherwise, they would be out of business.
What will corporate successlook like in the decadesahead?Certainly, the rules of
the game have changed. Corporations are now finding that making good products and
trying desperately to satisfy customers are still necessary,but are no longer sufficient. Nor
is it enough to focus on traditional earning figures alone. The key to successin today's
business environment is the simultaneous delivery of a superior return to investors,
focusing
proactively managing risks,
on core businesses,removing constraints, doing
businessdifferently, as well as maintaining sustainablegrowth rates.
A team of experts at Price Waterhouse Coopers aptly declared that, even though,
these challenges may look new; essentially, they are the same old ones in a different guise
(Black et al., 2001, p.24). The three aspects of market activity, that is risk, growth, and
fact
is
king
investors
be
The
that
to
cash
and
require an adequate
crucial.
return, continue
has
is
bear,
has
What
for
though,
the
they
the
changed,
not changed.
risks
compensation
focus. Despite the fact that the capitalist system has always seemed to be structured to
is
it
(i.
interest
the
the
the
the
shareholders);
only now, with
equity e.,
of
owners of
serve
increased globalization and a sophistication of financial markets, that shareholders'
interests have become the focal point for all critical corporate activities. Successful
8
companies of the future will be those that make managing and creating shareholdervalue
(SHV) the central goal of their corporate and businessstrategies.
There is no lack of evidence that focusing on optimizing shareholder value is the
best way to ensure a firm's long-ten-n prosperity. McTaggart et al. (1994, p. 10), for
"maximizing
is
that
argued
shareholder value
example,
superior to any other governing
it
lead
because
decisions
to
the
managers make
objective a company might adopt
will
most
likely to increase the company's competitive, organizational, and financial strength over
time". However, corporate managersmay not always engagein transactionsthat are solely
in the best interest of shareholders.Studies show that those managerswho fail to deliver
find
in
for
their companiesat a
to
the
race
global capital resources,will
value shareholders
it,
(200
1,
13)
"They
disadvantage.
Young
O'Byrne
As
must
aptly
put
p.
and
competitive
learn to navigate the rough seas of competitive capital markets, or they will find
themselvesreplaced by managerswho can". Rappaport (1998) also points out:
"The threat of takeover is an essential means of constraining corporate
managers who might choose to pursue personal goals at the expense of
be
Any
significant exploitation of shareholders should
shareholders.
it
lower
This
lower
in
to
what might
price, relative
stock price.
a
reflected
be with more efficient management, offers an attractive takeover
in
for
many cases will replace
another company, which
opportunity
incumbent management." (p.4)
Likewise, Copeland et al. (1996) reported that maximizing shareholder value
living,
higher
linked
be
productivity
overall
greater
of
standard
to
a
with
closely
appears
functioning
better
equity market.
and competitiveness, and a
"If countries whose economic systems are not based on maximizing
do,
lower
investors
than
those
who
return on capital
shareholder value give
9
they will slowly be starved for capital, as capital markets continue to
falling
farther
farther
behind
in global competition. - (p.4)
globalize,
and
They go on:
"If suppliers of capital do not receive a fair return to compensatethem for
the risk they are taking, they will move their capital across national borders
in search of better returns. If they are prohibited by law from moving their
invest
less.
Either way, nations who
they
capital,
will consume more and
don't provide global investors with adequatereturns on invested capital are
doomed to fall farther behind in the race for global competitiveness and
decreasing
living.
" (p.27)
suffer a stagnating or
standardof
Empirical studies and business reports show that there has been widespread
interest
in
SHV-based
systems and performance measurement approaches
worldwide
(Ittner & Larcker, 1998; Black et al., 2001). A good number of relatively high-profile
implementing
SHV
installing
have
towards
taken
a
and
steps
already
corporations
but
in
in
Japan,
USA,
Europe,
the
also many other
and
measurementsystem -- not only
China,
Brazil,
Korea,
India,
Singapore,
South
that
and
of
emerging economies such as
Hungary. To quote Black et al. (2001, p.255) over 5% of the FT 500 companies and about
8% of the FT Global 500 have now installed a SHV/performance measurement system
lead.
have
been
large
take
the
in
the
to
the
ones
corporations
and, many cases,
The growing predominance of the SHV culture is largely a consequenceof several
developments,
which, among others,
major
3
include the following:
1) The globalization and deregulation of financial markets;
2) New advancesin information technology including the internet;
3) Generational changesin attitudes toward savings and investment;
(2001).
O'Byrne
Young
(2000);
Soros
(2000);
Shiller
for
details,
and
and
For more
see example,
10
4) The expansionof institutional investment;and
94
.
5) 'Irrational exuberance
The global economy is increasingly characterizedby a freer trade in factors as well
in
investors
have
Among
this
that
things,
the
as
goods and services.
other
means
now
faster
their
money much
and more easily around the world as they
possibility of moving
in
interest
As
the
search of
greatest return.
a result,
rates, exchange rates,
are constantly
in
interrelated,
billionaire
invariably
American
says
and stock prices various countries are
financial
financial
further
George
Soros.
He
to
that
markets
assert
mogul,
goes
global
and
influence
In
throughout
the
tremendous
amount
of
economic
conditions
world.
on
exert a
today's business environment, financial capital enjoys a privileged position as it is more
factors
(Soros,
2000).
than
of
production
other
mobile
Moreover, interest in all kinds of stock: in high tech companies, in new and oldin
in
investing,
has
in
firms,
grown unprecedentedways recent
as well as general
economy
history. This culminates in a colossal worldwide explosion of mutual funds, unit trusts, and
funds.
like
hedge
According
investment
institutional
forms
to some observers,
of
novel
in
financial
have
through
mutual
especially,
companies,
stake
a
many more people can
funds or pension funds. What is of particular importance to corporate managers,though, is
by
funds
that these
professional managerswho care only about performance
are controlled
hired
(Young
highest
them
the
delivering
to
and
the
people who
possible returns
and about
O'Byme, 2001, p-7).
4 The term "irrational exuberance" was coined by Alan Greenspan,chairman of the US Federal Reserve
from
Yale
Shiller
book
by
Robert
Professor
boom.
It
dot.
the
title
describe
Board, to
the
of a
was also
com
it
developed,
bull
his
book,
(2000)
Shiller
boom.
In
that,
the
the
market
as
University that examined
argued
for
demand
ftiture
the
shares.
and stimulated
generatedoptimism about
On the other hand, one could arguethat corporatemanagersoften get
if
confused;
not trapped, when they face multiple objectives or when they are held accountableto more
than one party/objective. To avoid such confusion or conflicting signals, they have to focus
on only one prime overriding objective. This simplifies matters and makes a great deal of
difference. As Brittan (1996) pointed out, "People function best if they have specific
for
responsibilities
which they are held accountable by means which are transparent,
verifiable and respect the realities of human nature." The objective of maximizing
shareholder value seems to be absolutely sound as it not only allows for just such a
but
it
responsibility,
also provides the transparent and verifiable means necessary to
measure it. In short, one can conclude that it has all the characteristics of the "right"
objective.
The theories underlying SHV have a long history stretching back to the intellectual
work of Markovitz (1952), Modigliani and Miller (196 1), Lintner (1965), Sharpe (1964),
just
few.
(1965)
According to Black et al. (2001, p.21), the SHV
Fama
to
and
name
a
discipline started to take on a life of its own as a result of work done on the Capital Asset
Pricing Model (CAPM). The fundamental idea behind this model is that the expected
is
linearly
its
by
to
related
systematic or market risk, as measured beta.
return on equity
5
The higher the beta, the greater the expectedreturn. Black et al. further point out that:
"the key insight of the CAPM model - one that is central to the SHV view of the
is
discount
factor
is
[one]
there
to assess
that
a risk-weighted
which allows
world the value today of tomorrow's developments, profits and cash flows. This discount
5It is important to note that, as great a developmentas CAPM was, it is not without seriouscriticism. The
it
is
large
to
that we will not attemptto cataloguethem all.
trying
validate
so
empirically
numberof papers
For more detail, seefor example,Blum and Friend (1973); Famaand French(1992,2004); and Bornholt
(2007).
12
is
derived from observations of capital markets, and defines
rate
what the
opportunity cost of equity to investor in the market is. It stateswhat the company
has to earn in order to justify the use of the capital resourcestied
in
the
up
business."(p.22)
The SHV approach has gained widespread acceptance since the publication
of
'Creating Shareholder Valueby Alfred Rappaport in 1986.6This text provided a new
and
in-depth assessmentof the rationale for the SHV approach as well as the tools neededto
implement it as a standard for businessperformance.According to Rappaport (1998, p.32),
the total value of an entity such as a firm or businessunit is equal to the sum of the values
its
its
debt.
This economic or strategic value of the business is termed
of
equity and
44
corporate value" and the value of the equity portion is termed "shareholder value". The
firm
be
the
then
value of
can
written as:
Corporate Value = Shareholder Value+ Debt Value
(2.1)
Thus, in order to determine shareholdervalue, one must first determine the value of
the total firm or business unit, that is, corporate value. To value a company, several writers
firms
(e.
g., Damodaran, 2006; Copeland, 1996; Titman and
and management consulting
Martin, 2008; McKinsey & Company, 2005), have proposed analyzing the company's
historical performance; defining and projecting free cash flow over the short, medium and
long run; and discounting the projected free cash flows at an appropriate cost of capital.
Using the free cash flow (FCF) approach, the total businessvalue is determined by the so-
A revised and updatedversion of the original edition waspublished in 1998.
13
called "Free Cash Flows to the Firm" (FCFF), discounted at the "Weighted Average Cost
of Capital" (WACC). Since the expected FCFF cannot be estimated forever, it is suggested
that it be estimatedduring the "forecast period" of five or ten years and that a "residual
(or
be
for
beyond
forecast
terminal
the
the
value"
value)
estimated
period
period. The
present value of the FCFF over the forecast period plus the present value of the residual
business
in
In
the
the
of
a
whole.
general terms, the value of a
would
result
value
as
value
firm that expects to sustain extraordinary growth for N years can be written as:
Corporate Value
]+
[Terminal
ValueN
Expected Cash Flow to the Firmt
C)N
(I + WAC
(I + WACC)t
t=1
(2.2)
For a more precise estimate of corporate value, a third component to be added to
the corporate value model; that is, the current value of marketable securities and other nonbe
investments
to
that
cash, which are not essential
can
converted
such
as
assets
operating
be
firm
33).
Thus,
1998,
business
(Rappaport,
the
the
to operating
can written
value of a
p.
as the sum of three components:
CorporateValue = Presentvalue of cashflow from operationsduring the forecast period
Residual value
(2.3)
Marketable securitiesand other nonoperatingassets
After the value of the firm as a whole has been determined, the part of the value
follows:
is
available to the shareholders calculated as
14
ShareholderValue= Corporate Value- Debt Value
or
N
SH VO
FCFF,
(I+ WACC,)'
+
[WACCI
FCFF N+l
-gN_--
oo CF,
(I+ RFI,
1=1
(2.4)
where
SHVo
FCFFt
N
9N
WACCt
CFFI,
RFI,
t
t
= shareholder value in year 0 (current year)
free
flows
firm
in
to
the
= expected
cash
year t
= number of years of high or extraordinary growth
beyond
= stable growth
year N
= weighted average cost of capital in year t
flow
fixed
income
= expected cash
of a
security (debt obligations and other
claims such as preferred stock in year t
be
discount
to
to
the cash flows in year t
= required rate of return
used
The idea of measuring shareholdervalue by comparing cash flows generatedby the
business against the cost of capital used in generating those flows is to provide a clear
degradation
understanding of value creation or
over time within each business unit.
Rappaport (1998, pp.55-57) indicated that shareholder value is driven by seven factors:
income
investment,
fixed
tax
rate, working capital
sales growth, operating profit margin,
investment,
duration.
The theory
capital
weighted averagecost of capital, and value growth
is that improvement in these value drivers leads directly to an increasein shareholdervalue
as shown in Figure 1.
In the 1990s, interest in the SHV approach received a further boost first by the
by
Tom
Companies'
Measuring
Managing
Value
'Valuation.
the
and
of
publication of
15
Copeland, Tim Koller, and Jack Murrin from the McKinsey GroUP7 and second by the
,
publication of 'The Quest for
Value' by G. Bennett Stewart.8 The Copeland text
demonstratesin great detail how businessescreate value and argues that companiesthrive
when they create real economic value for their shareholders.This text further assertsthat
by
investing
companies create value
capital at rates of return that exceed their cost of
capital (WACC). Copeland et al. (1996) put forward the idea that the application of SHV
is
both
feasible
to
principles
companies
and highly desirable. They also debate whether
such an approach can yield substantial benefits not only to shareholders,but also to other
'Stakeholders' in a company.
On the other hand, Stewart's book (The Questfor Value) introducesthe idea of
economic value added (EVA) -- a revolutionary new concept that has been developed by
the US consultants Stem Stewart & Company to identify and track sources of value
by
that
traditional accounting and financial measures.While the
are not explained
creation
be
is
EVA
acronym may
creative,
simply a variant of the well-known concept called
9
is
income.
income
It
the
adjusted after-tax operating
residual
minus a capital
simply
financial
in
literature
EVA
1989
(Finegan,
Although
the
term
appeared
as early as
charge.
1989), it did not attract that much attention until an article appearedin Fortune magazine
instrumental
in
Stewart's
Nevertheless,
September
20,1993.10
text
promoting and
was
on
advancing this new/old value-basedmetric.
7 Copelandet al. (1996).
8 Stewart(199 1).
9 It is also called economic profit (EP). See,for example,Arnold (2005, p. 828).
10Tully (1993).
16
It goeswithout saying that all thesebooks have contributedin one way or another
to the promotion as well as to the popularizing of the SHV discipline. By so doing,
companies have achieved a real and sustainable increase in their share value. The
TM
FinanceAdviseorTM 2.0, CAPI
emergence of recent software (e.g., EVManager
,
Balanced Scorecard EVA Model, ART-EVATm) has allowed SHV to continue to advance
as more and more companies, which previously had neither considered it nor felt
competent or comfortable applying it, are now beginning to implement it.
It has long been argued that corporations should be run in order to maximise
shareholder wealth. Black et al. (2001, p.257) stated that "The emergence of the SHV
concept reinforces the messagethat companies have to improve their returns on invested
capital as well as reduce their cost of capital." Friedman (1970), for example, affirmed this
by suggesting that the firm's sole purpose should be to operate for shareholders.However,
managing a company for value requires delivering a maximum return to the equity holders
while balancing the interests of the other important constituents, including customers,
employees, government, and suppliers. The proponents of the shareholderwealth approach
frequently argue that maximizing shareholder value leads to the maximization of all
here
is
by
The
that
stakeholder claims.
argument
adopting the measures necessary to
interest
the
a
company
can
advance
maximize corporate value,
of other stakeholders as
in
it
its
This
In
to
the
adds
society
also
value
which
operates. the
well as
shareholders.
literature, this phenomenon has been linked to a win-win situation (Cooper, 2000, p.81).
When corporations correctly implement this strategy, not only do the shareholdersbenefit,
17
but everybody else does as well. The following quotation sums it up (Copeland et al.,
1996):
"Empirical evidence indicates that increasing shareholder value does not
long-run
interests of other stakeholders. Winning
the
conflict with
companies seem to create relatively greater value for all stakeholders:
customers, labor, the government (via taxes paid), and suppliers of capital.
Yet, there are additional reasons-more conceptual in nature, but equally
compelling-to adopt a system that emphasizes shareholder value. First,
is
best
for
know.
Second,
the
that
metric
we
shareholders
value
performance
are the only stakeholders of a corporation who simultaneously maximize
in
finally,
And
to
their
seeking maximize
own.
companies
everyone's claim
that do not perform will find that capital flows toward their
22)
"(p.
competitors.
Similarly, in 1996, the CEO of Coca-Cola, the late Roberto C. Goizueta, argued the case
for putting shareholders(or owners) interests first:
"Saying that we work for our share owners may sound simplistic - but we
frequently see companies that have forgotten the reason they exist. They
in
be
in
to
things
to
try
all people and serve many masters
all
vain
may even
is
different
In
their
they
primary calling, which
miss
ways. any event,
many
to stick to the business of creating value for their owners... [While] a
healthy company can have a positive and seemingly infinite impact on
It
drag
is
things.
the
cannot
of
social order
on
a
others, a sick company
its
It
less
jobs,
to
the
employees.
opportunities available
widen
much
sustain
It
to
philanthropic causes....
cannot
give
customers.
serve
cannot
The real and lasting benefits we create don't come because we do good
deeds, but because we do good work - work focused on our mission of
I
"'
for
the
the
time
company.
people who own
creating value over
firm's
idea
to
be
finally
the
maximize
that
It can
operating
a
of
concluded
is
doctrine
but
is
this
widespread
gaining
now
only
one,
a
new
not
value
shareholder
being
is
the
1-3)
(1998,
this
that
as
Rappaport
embraced
now
concedes
pp.
acceptance.
" Remarksdelivered to Executives' Club of Chicago,quotedin Coca-ColaCompany annualreport, 1996.
18
"politically correct" stance by corporate board membersand top managementin the United
Kingdom, continental Europe, Australia, and even in Japan.However, in the United States,
it has been a long established tradition. Rappoport also assertedthat, as is the case with
other good ideas, shareholder value has moved from being ignored to being rejected and
then to becoming self-evident. Furthermore, he predicts that over the next ten years,
shareholdervalue will more than likely become the global standard for measuring business
performance.
2.3 VALUE-BASED
METRICS
Recent surveys have indicted the increasing importance of value-based metrics as
benchmarks for assessingand managing corporate performance (see, for example, Ittner
2001).
10
firms
Larcker,
1998;
Black
In
15
the
to
et
and
al.,
past
years, many consulting
have been caught up in a fierce competition to promote their service regarding value-based
desperately
hearts,
dollars
They
try
to
the
capture
minds, and
of
performance measures.
has
in
(1996)
interesting
CFO
Myers
In
the
magazine,
article
an
corporate executives.
dubbed this engagement as the "Metric Wars". Measures such as Economic Value Added
(EVA), Market Value Added (MVA), ShareholderValue Added (SVA), Economic Profit
(EP), Cash Flow Return on Investment (CFROI), Tobin's Q or Market to Book Value,
Total Shareholder Return (TSR), and other value-basedmetrics are virtually all "rooted in
the concept that companies should not look at reported earnings, which are subject to
its
"(Myers,
how
but
distortions,
of
capital
a company's returns exceed cost
at
accounting
1996, p.42). Money managers, business analysts, corporate executives, consultants, and
19
academicshave increasingly utilized these metrics as they provide unique advantagesover
traditional accounting-based metrics such as EPS, ROA, ROE, or balance sheet ratios in
reflecting value creation. In this section, six of the more popular value-basedperformance
metricsarepresentedand discussed.
2.3.1 Economic Value Added (EVA)
More recently, Economic Value Added (or EVA) has been attracting considerable
in
financial
the
attention
press and corporate world. Biddle et al. (1997, p.302), for
instance,pointed out that citations of EVA in the businesspress have grown exponentially,
from
in
I
1989 to 294 in 1996. Fortune magazine in its breaking article (Tully,
rising
1993), branded EVA as "the real key to creating wealth". In August 1997, the Economist
interesting
also published an
article about EVA, crowning it as "a star to sail by". As a
new management tool to gauge corporate performance and value creation, it has been
broadly accepted by a wide range of senior executives, financial analysts, and institutional
investors. Moreover, an AICPA workshop on the future of financial management(April
1995) predicted that EVA would replace EPS (earnings per share) in The Wall Street
Journal's regular stock and earnings report (Zarowin, 1995, p.48).
Today, in North America and around the world, a sizeable number of companies
have adopted EVA as their key performance metric, even linking it to the fortunes of their
been
has
EVA
The
also
reflected on the capital and
growing popularity of
executives.
houses
brokerage
increasing
are
number of security analysts at
money markets, where an
losers
(Topkis,
1996).
Furthermore,
EVA
to
as companies and
pinpoint winners and
using
20
their officers are increasingly being held accountablefor shareholdervalue, EVA, which
forces managersto think and behave like shareholders,is becoming more and more a
fundamentalpart of both running andjudging a business.
The concept of EVA is neither new nor complicated. It dates back to Alfred
Marshall, a famous English economist who, over 100 years ago, wrote that a firm, in order
to create real earnings, must generatea profit in excessof its capital cost (Marshall, 1890).
What Marshall was actually saying is quite simple. A firm can only createtrue value for its
if
if
it
is
investment,
financial,
and
only
capableof making sound
shareholders/owners,
and
decisions,
in
its
is
If
that
not the
operating
which yield a return excess of
cost of capital.
is
business
from
there
true
to
the
the
then
profit
and,
actually,
no real
or
value added
case;
be
loss.
This
the
thus
at
a
valuable
company
would
operating
shareholders' viewpoint,
insight of Marshall's has been a good management practice for business growth and
last
beginning
the
of
century.
survival since
It is interesting, though, to note that, the managementguru, Peter Drucker, in the
fifties as well as in a more recent 1995 Harvard Business Review article, reiterated this
idea by saying that
"Until a business returns a profit that is greater than its cost of capital, it operatesat
The
it
had
if
it
loss.
Never
taxes
enterprise still
a genuine profit.
as
mind pays
a
full
its
does
in
It
devours
it
less
than
not cover
to the economy
resources.
returns
does
it
Until
then,
the
not
cost of capital.
costs unless the reported profit exceeds
59).
1995,
it.
"
(Drucker,
it
destroys
p.
create wealth;
In the twentieth century, the concept of EVA was the object of extensive academic
debate in the accounting and finance literature and it has been operationalized under
21
12
labels
including
Residual Income (RI). In the past several years, a US-based
various
business consulting firm Stem Stewart & Company (hereafter referred to as Stem Stewart)
has been promoting a variant of RI under the acronym of Economic Value Added or EVA
13
for
as a tool
measuring corporate performance and value creation. This new/old measure,
though, is similar to residual income (RI), but distinguishes itself by a series of
distortions
inclusion
to
the
adjustments eliminate potential
of accrual accounting as well as
14
both
debt
in
equity
of
and
sources of capital the calculation of cost of capital.
According to Stem Stewart, EVA is defined as the difference between a firm's net
for
income
(NOPAT)
taxes
the opportunity cost
after
operating
and an appropriate charge
is
invested
in
firm
136-138).
As
EVA
(Stewart,
1991,
that
a measure
pp.
such,
of all capital
firm's
is,
in
that
to
a return excessof a
produce an economic profit,
of a company's ability
follows:
be
form,
for
EVA
In
t,
a given year, can expressedas
cost of capital. equation
]=
[WA
(ROIC, - WACC, ) x TIC,
CC, x TIC,
E VAI = NOPA T, -,
-,
(2.5)
in
financing
but
before
t;
is
NOPATt
taxes,
year
the
costs
after
profit
net operating
where
TICt-I is the economic book value of the total capital invested in the company, at the
12
Residualincome (RI) is generally defined as what is left from accountingearningsafter deductinga charge
for investedcapital to reflect a minimum required rate of return on the investedcapital. Book value is usedas
is
for
firm's
the
RI
Thus,
invested
of
as
a
product
calculated
any
period
a
the measureof
capital.
firm's
by
its
the
firm's
between
'spread'
the
return-on-equityand equity-cost-of-capitalmultiplied
Motors
General
is
interesting,
It
that
beginning
to
though,
note
of the period.
accountingequity value at the
in
income'
'residual
Electric
the
General
in
1920s
term
the
the
this
coined
and
concept
applied a variant of
Bromwich
for
decentralized
divisions.
See,
its
it
and
example,
the
1950sand used to assess performanceof
Walker (1998, p.392).
13EVA was commercially developedin 1982by the Stern Stewart& Company.SeeGrant (2003, p. 1).
"' See,for example,Madden (1999, p.202).
22
beginning of year t, which includes both the interest bearing debt and equity'5 it stands
-as proxy for all cash invested in the company since its inception; WACCt is the weighted
average cost of capital in year t, that is, the minimum rate of return demanded by both
lenders and shareholders; ROICt is the return on the capital employed in the company in
is
by
dividing
NOPATt by TICt-1; [ROICt - WACCJ is the
t
year
and
calculated
[WACCt
*
is
i.
TICt-1]
the
profitability spread; and
annual capital charge, e., the cash flow
required to compensate all the company's capital providers, equity as well as debt, for the
has
been
during
the
that
the year.
capital
risk of
used
Thus, for an ongoing concern, a firm's EVA can be defined as the difference
between its un.levered net operating profit after tax (NOPAT) and a dollar charge for the
in
business-as
by
invested
the
the
total
measured
amount of
capital
capital employed
(TIC) times the weighted average cost of capital (WACC). The NOPAT in the EVA model
financial
to
to
total
the
provide a cash return
all
pool of profits available
represents
in
firm's
firm.
be
It
terms
the
the
to
pre-tax operating
of
can expressed
providers of capital
(T):
less
EBIT,
taxes
operating
unlevered
profit,
NOPA T= EBIT(I - T) = (S - COGS- SG &A Exp - Dep)(I - T)
(2.6)
As is shown in equation (2.6), EBIT is a function of the firm's sales (S) less expenses
including cost of goods sold (CoGS); selling, general and administrative expenses(SG&A
Exp); and depreciation (Dep). Unlike the operating profits calculated by many companies,
15It is important to note that Stern Stewart make a number of adjustments for their publicly available
database as well as for their corporate clients not all of them available to the public.
23
both depreciationand businesstaxes (T) are subtractedfrom NOPAT becausethey
are
genuine economic costs that have to be managed(Ehrbar, 1998, p. 131).
In turn, for a firm financed solely with debt and equity, the weighted averagecost
(WACC),
is
defined as follows:
of capital
WACC = (WD)(RD)(1- T) + (WE)(RE)
(2.7)
where,
WD= the proportion of total market value (debt plus equity) contributed by debt capital
Wx,= the proportion of total market value (debt plus equity) contributed by equity capital
T =Tax rate
RD= pre-tax cost of debt
RE:
-'-'-cost of
equity
16
Total invested capital (TIC) is usually defined as the sum of the working capital
fixed
The
requirement and net
assets.
working capital requirement consists of accounts
inventories,
Taken
together,
net
payable
and
accrued
expenses.
of accounts
receivable,
these financial developments show that the firm's EVA can be expressedin basic terms as
follows:
[S
EVA, = - CoGS - SG &A Exp - Dep], (I - T) - [WACC, x TIC, ]
_,
16Also called "capital" or "capital employed".
24
(2.8)
The aboveEVA model (Eq. 2.8) demonstratesthat EVA is a financial management
balance
integrates
into
that
and
sheet
system
operating efficiency
management
one easily
be
by
that
can
all managers and operating people. The
accessible measure
understood
is
into
EVA
that
that
takes
a performance metric
model also shows
account the cost of the
factor
the
that no conventional measuresuch as accounting
company employed -- a
capital
(EPS),
(ROA),
(ROE)
earnings
per
share
return
on
assets
or
return
on
equity
earnings,
includes. As a matter of fact, the opportunity cost of capital is what makes EVA a truly
17
business
focusing
financial
By
metric
and
an
accurate
gauge
of
value.
on the
unique
for
EVA
the
cost
all
capital
opportunity
employed,
profit remaining, after subtracting
dollars.
in
investor
With
EVA
technology
the
real return a company can get on
shows
hand, investors have the upper hand. If, for whatever reason, a firm cannot generate
flow
its
investors
its
the
to
of capital to that
will reduce
cost of capital;
enough return cover
lower
its
downward
drastically
to
their
stock
reflect
re-price
company and more
expectations.
The model also reveals that EVA is not only a measure of performance, but it is
for
if
how
It
true
value
and a company creates
also a measure of value creation. measures
its shareholders. A company with a positive EVA creates value; a zero EVA maintains
In
EVA
value.
symbols,
suggestsa squanderingof
value; whereas a negative
17It should be noted, however, that like EVA, the accountingmetric ResidualIncome (RI), makesa cost of
being
is
that
firm's
to
above
over
and
the
generated
what
value
profit
calculate
equity capital chargeagainst
due
EVA
less
is
less
than
RI
to
However,
investors.
popular
sophisticatednot mention
much
requiredby the
lacks
due
fact
it
by
the necessaryadjustments
that
to
the
to the absenceof support consultantsas well as
See
figures
income
the
to
balance
the
anomalies.
accounting
remove
statement
sheetand
equiredto both the
for example,Francis and Minchington (2000).
25
If [ROIC - WACC] x capital employed >04
value is created
If [ROIC - WACC] x capital employed =04
is
value maintained
If [ROIC - WACC] x capital employed <0 --) value is destroyed
Stem Stewart and EVA proponents argue that EVA is much more than just a
is
It
corporate metric.
a modem management system that challenges a company to look
hard at how it conducts and governs its business.Ehrbar (1998, p.5), for example, argues
that EVA is definitely not another form of rightsizing or downsizing, nor is it a fad. It is a
"fundamental way for measuring and managing corporate performance... It tells managers
to do those things that they intuitively know are the right things to do, but that so often are
obscuredby conventional accounting-basedmeasuresof performance."
The appeal of EVA lies in its ability to integrate the often disparate management
functions of strategic thinking, measuring performance, evaluating new investment
decisions,
opportunities, operating
communicating with
investors, and motivating
becomes
focus
for
decisions,
When
EVA
it
the
employees.
singular
all
establishesclear
links
functions.
CFO
Basil
Scott
Anderson
Paper
and accountable
among all corporate
of
18
states:
"We used to have different financial measuresfor different purposes- discounted
for
decisions,
flow
for
rewarding performance and the
another measure
capital
cash
like.
Now EVA is one measure that integrates all that. it offers an excellent
...
...
link to the creation of shareholdervalue."
18Cited by Walbert ( 1995, pp. II 1-112).
26
Jim Meenan, CFO of AT&T's communications services group expressesa similar
view:
"Every decision is now basedon EVA. The motivation of our businessunits is no
longer just to make a profit. The drive is to earn the cost of capital. when
you
...
drive your businessunits toward EVA, you're really driving the correlationwith
the market value."(Walbert, 1995,p. 112)
In fact, EVA is the only financial management system that provides a common
language across all corporate functions. No other financial measure can do this. Figure 2
illustrates a typical
financial management system where multiple
measures and
terminology are used to express financial goals and objectives. Usually, the end results of
such a practice are confusion, inconsistent standards,and above all non-cohesive decision
making. In contrast to this traditional system, Figure 3 shows how EVA can be used as a
managerial tool to streamline and simplify the whole managementprocess; thus providing
a more consistent framework for decision-making. Needless to say, this type of
is
importance
consistency of utmost
as it unites and aligns the interests of all corporate
employees-from CEO to CFO, to factory managers,to floor operators-with the overall
goal of increasing shareholder wealth.
The most obvious way that EVA helps managers make better decisions for their
is
by
for
their
the cost of all capital employed. The capital
companies
charging
operations
is,
in
fact,
charge
what sensitizes managersthroughout a company to pay closer attention
to the investment on hand. Indeed, EVA compels employees to use assetsmore diligently
for
instance,
by
EVA,
One
company's experience with
was summed up
and efficiently.
Federal-Mogul's CEO Dick Snell in the statement:
27
"EVA acceleratedour ability to divest assetsand focus on our manufacturingcore,
to restore earningsimprovements,and to begin to grow by acquisition.EVA was
the criterion we used to evaluate each and every action-whether for
improvement,
rationalization, continuous
or growth. With the clarity it provided,
EVA allowed us to complete our evaluationsquickly and move on to the next
challenge.We are confident that EVA will continueto help all of us to makebetter
businessdecisions,to build a world-class company, and to enhanceshareholder
"19
wealth.
In short, using a single financial tool, such as EVA, not only eliminates the type of
but
CEO's
that
most
and other senior executives are concerned about;
confusion
importantly, it links all decision making to a common focus: how to improve EVA, and
how to make companies more valuable.
Furthermore, as many CEO's are discovering, EVA can also be used to transform
Quaker
Oats,
William
bottom.
CEO
from
For
the
top
to
of
example,
corporate culture,
Smithburg who supported this notion, cited that "Our operating managersare much happier
have
to
think
them
the
things
that
that
we
want
all
of
embodies
measure
a single
we
now
Before,
business.
in
their
we used a whole variety of measures and
running
about
than
different
for
to
that
rather
managers
confuse
our
only
served
purposes, and
procedures
EVA
74).
In
1994,
(Stewart,
this
could spearheada
regard,
to clarify their mission"
p.
how
it
better
the
to
in
the
align
of
problems
answers
as
management
genuine revolution
interest of agents with principals and of how to bind managersand employeesto the will of
the shareholders(Ehrbar, 1998).
19Cited by Ehrbar (1999), p.221.
28
Obviously, EVA isn't without some problems. In an attempt to allow EVA to
approximate value maximization,
Stem Stewart recommends making numerous
These
NOPAT.
to
the
adjustments
accounting assets and
adjustments are necessaryto
introduced
by
GAAP,
as well as to make EVA a more
eliminate any accounting anomalies
date,
To
Stem
accurate period-to-period measure of performance and value creation.
Stewart has identified and catalogued a total of 160 potential adjustments and they are
20
designed
to reflect three purposes:
primarily
a)
To undo accounting conservatism;
To immunize performance measurementagainst past accounting "errors";
and
C)
To make current EVA a better measureof market value.
Some of the more common adjustments proposed by Stem Stewart are listed
21
below:
9
Capitalize R&D expenses.
9
Capitalize operating leaseexpenses.
0
Add back any inventory LIFO reserves.
o
Add back deferred tax reserves.
0
Add back bad debt reserves.
e
Add back one-time restructuring charges.
e
Add back amortization of goodwill.
20For a completediscussionincluding somenumerical examples,seeYoung and O'Byrne (2001, chapter6);
1).
161-18
(1998,
Ehrbar
(1998);
Peasnell
O'Hanlon
9);
pp.
(2003,
and
Grant
and
chapter
21
SeeStewart, 1991, p. 112.
29
While it is conceptually sound to adjust for various distortions as proposedby Stem
Stewart, it has been correctly argued that most of these adjustments are fairly complicated
and insignificant, some of them are even inconsistentwith others,and aboveall many of
them often call for excessive reliance on judgement'. As aptly put by O'Hanlon and
Peasnell (1998, p. 442), "Stem Stewart appears to have devised the accounting
in
adjustments, an essentially ad hoc fashion, on the basis of consulting experiences,and
the adjustments do not seem to be clearly underpinned by any formally expressedtheory of
income measurement or some would put it more bluntly, arbitrary decisions."
At the
Whirlpool Corporation, for instance, the merit of 160 adjustments was debated prior to
implementation, and a decision was reachedto make the adjustments only for factors that
big
difference.
In the end, adjustments were made in only four areas: goodwill,
made a
leases,
capitalized
restructuring charges - which are each viewed as investment - and
22
interests
in
investments.
minority
Apart from any further accounting difficulties that might arise when estimating
NOPAT and TIC, in practice, many "cost of capital" issues remain debatable that can
impact the estimation of EVA. These cost of capital challenges have both theoretical and
be
foundations
(e.
Fabozzi
Grant,
2003).
to
tackled
that
and resolved g.,
and
empirical
need
While estimating the cost of debt is fairly straightforward due to the fact that bond yields
difficulties
the
the
cost of equity poses estimation
measurementof
are readily observable;
from
the uncertainty surrounding the appropriate model and potential estimation
arising
have
its
limitations,
is
Despite
shown that
all
recent reports
errors whichever model used.
22Cited by Shaked(1997, p. 3).
30
capital asset pricing model (CAPM) remains the most commonly used approach to
23
firm's
estimate a
cost of equity. The Sharpe-Lintner CAPM risk-retum relation to
estimate the cost of equity capital is an expectational model and its basic intuition can be
follows:
summarizedas
E(R, ) = Rf +, 6, [E(R,,, ) - Rf ]
(2.9)
denotes
i,
is
E(R)
Rf
the
the expected return on a risk-free
expected return on asset
where
bond),
is
(such
6,
)/
)
R
as a government
asset
a measure of volatility
= cov(R,, ... var(R,,,
it
in
the
the
to
and represents
sensitivity of
asset'sreturn variation the market return. E(R,,,)
is the long-term expected return on the stock market (e.g., S&P 500, FTSE-100, or some
index).
Thus,
the expected return on a risky asset, such as an equity
other market
investment, equals the return on a riskless assetplus a risk premium. That risk premium
between
difference
by
[defined
be
the
the
as
market risk premium
multiplying
can obtained
[E(R. ) and Rf ] by the asset's market beta,,8,. Suffice it to say, that determining and
(Ri)
is
CAPM's
to
the
and
of
estimate
components crucial
properly calculating each of
differing
lead
interpretation
deal
judgment
to
which might somehow
and
of
requires a good
in
CAPM,
important
is
It
2001).
O'Byrne,
the
that
the
(Young
to
note
also
and
conclusions
beta
firms;
to
varies across
all
only
risk-free rate and market risk premium are common
firms.
While CAPM is a widely used model for estimating the cost of equity, several
(1992,1993,1995,1996,2004)
French
Fama
and
empirical studies, most notably
23See,for example,Bruner et al. (1998), Famaand French(2004), Rutterford (2000), and Grahamand
Harvey (2001).
31
have
raiseddoubtsabout the validity of the single-factorCAPM model as an accurateestimator
financial
Fortunately,
the
economists and consultants have devised and
of
cost of equity.
be
that
can
proposed more sophisticated models
used to estimate a firm's cost of equity
in
lieu
CAPM.
in
Nevertheless,
the
the absenceof other simplified
of
single-factor
capital
for
CAPM
provides a relatively good starting point
models,
estimating the cost of equity
(Perold, 2004; Palliam, 2006).
Furthermore, and as noted earlier, calculating EVA could provide a positive or
dollar
indicates
firm
its
the
negative
value, which
whether
earned an excessabove cost of
during
Critics
EVA
any given year.
of
claim that there are two problems with this
capital
how
does
dollar
judge,
EVA
(Reilly
Brown,
1997,
741):
First,
p.
value of
and
one
annual
if
its
firm
is
Although
the
to
time,
you would
prospering relative
past performance?
over
is
EVA
the
the
to
time,
grow over
question whether the rate of growth of
absolute
want
EVA is adequate for additional capital provided. Second, how does one compare EVA
Stem
different
To
business
these
problems,
sizes?
rectify
units of
among companies or
Stewart proposed that EVA be standardized or normalized by dividing it by the capital
by
(Stewart
100
beginning
the
the
evaluation year, and multiplying
of
outstanding at
(1991), p. 167). This effectively expressesEVA as a percentage of the beginning of year
capital:
ITICI-1
STANDARDIZED EVA, =]=
(NOPAT,
Ticl-l
32
100
WACC,
x
-
(2.10)
Clearly, one would want this EVA rate of return on capital to remain constantover
time, or ideally to grow. Also, using this ratio one can compare firms of different sizes to
determinewhich one has the largest economic profit per dollar of capital. This study usesthe
standardizedEVA, that is, the annual EVA deflated by the beginning-of-year capital as the
independent
variable.
Last but not least, and despite theoretical arguments and some empirical evidence
favouring the adoption of EVA worldwide, the implementation of this fairly sophisticated
financial management system is less straightforward than one based on traditional
24Moreover,
implementation
EVA
the
a successful
of
system
accounting-basedmeasures.
long-term
from
intensive
top
management,
and
commitment
requires, among others,
training programs for employees. In an article published by Fortune magazine (1995), G.
Bennett Stewart 111,one of the originators of EVA and a senior partner at New York-based
Stem Stewart & Company, refuted critics of EVA and argued that some of the common
failure
lead
EVA
(Stewart,
EVA
in
implementing
to
the
the
of
measure may
mistakes
1995). He concisely outlined five pitfalls that companies may fall into when implementing
EVA. If unaware of these traps; companies will pay the consequences.These are the
following:
1) Companies not making EVA a we of liLe:
24It is interestingto note that in 1992AT&T adoptedEVA but subsequentlyabandonedit for variety of
difficulty
demise
the
for
EVA's
the
the
of
the
and
of
metric
Some
complexity
the
are
reasons
of
reasons.
hiring
EVA
impact
the
the
of
a
their
the
with
metric
combined
on
of
actions
to
communicating employees
EVA,
discussion
For
AT&T's
EVA
see
the
with
had
experience
a
on
system.
CEO
championed
not
who
new
Ittrier & Larckre (1998, pp.215-217).
33
Calculating EVA is probably an important step, but it is certainly not sufficient. EVA has
to be the focus of a company's financial managementsystem and be fully integrated into
every managementdecision. EVA should never be a supplement to the reporting process,a
line on the page, or one measure in a "balanced scorecard". It must be the bedrock upon
is
built.
be
EVA
in
the
entire
reporting
process
must
constantly
which
also
reinforced
managementmeetings, training seminars, company newsletters, performance reviews, and
in communications with external parties such as security analysts and the financial press.
2) Companies ýjing to implement EVA too fi7s :
Becoming an EVA company, simply, cannot be done overnight. The larger the company,
the longer it will take to fully implement it. The changeover has to start with top
it
its
down
through
the
and
may take months
ranks
way
management,and gradually work
or even a couple of years.
3) Manazers not being sure:
Overpaid, mediocre or incompetent managers,who have an incentive plan that works for
for
incentives
What
EVA.
implementation
there
them to switch
the
them, often resist
are
of
for
held
be
EVA
they
creating
accountable
to the
will suddenly
system, under which
EVA
be
have
determinations
bonus
to
tied
to
to
Thus,
as
changes
compensation and
value?
it
to
a way make count.
4) Managers creating too much Luss.
issue
big
it
into
to
EVA,
When implementing
philosophical
a
many companies tend make
instead of keeping it simple. Managers get distracted by endless rounds of worthless
discussion about what it means to create value for the shareholder as opposed to the
34
large.
bottom
The
line
the
employee or
at
community
of EVA is that it is beneficial for all
the company's stakeholders, once it has been well integrated into the decision making
process.
5) Not enough training:
Some companies do not widely disseminate EVA knowledge throughout the organization.
To fully benefit from EVA, it is important to intensively train everyone in the organization
because even those with the smallest jobs can help create value. Employees must
how
their unit EVAs will be calculated and how, in detail, the EVA numbers
understand
be
linked to compensation.
will
2.3.2 MARKET VALUE ADDED (MVA)
EVA is designed to be a single-period measurethat tells what has happenedto the
wealth of shareholders. For publicly traded companies, Stem Stewart developed another
indicates
that
measure
whether or not a company has created an additional value to its
shareholders'wealth. This cousin of EVA was termed 'market value added' or MVA in
is
short and defined as the absolute dollars spread between the current market value of the
firm and the total capital that investors have committed to it since its formation (Stewart,
1991). In other words, MVA is the difference between cash in (what investors have
inception
(what
the
they could sell their
the
of
company)
and
cash
out
contributed since
$10
for
instance,
has
if
So,
for
total
today).
a
market value of
million,
a company,
claims
$8
$2
have
invested
had
if
it
then
that
million capital,
company would
million
only
a
and
35
Market Value Added. If this samecompany,though,had invested$11 million capital,then
its Market Value Added is a negative $1 million.
In calculating MVA, Stem Stewart first adds up all the capital taken in by a
during
its
lifetime
bank
loans,
through
securities offerings,
company
and retained earnings.
Second, it then makes some EVA-like adjustments (such as capitalizing and amortizing
25
R&D expenditures) to eliminate any accounting anomalies. These and other adjustments
in
book
into
book
to
value
are necessary; order convert accounting
economic
value or what
Stem Stewart calls 'adjusted book value'. In effect, the adjusted book value is what book
be,
if
financial
(Ehrbar,
it
1998).
Then,
third,
accountants
were
economists
value would
from
both
the company's
the
this
current market value of
adjusted capital amount
subtracts
26
debt and its equity. In equation form, MVA is calculated as follows:
M VA, ":" MV company, l -
BVassels,
(2.11)
l
where,
MVA
= market value added
Wcompany
= market value of company
BVassets
book
Stem
Stewart's
value of assets-in-place
adjusted
=
25Stem Stewartproposesa seriesof adjustmentsto the NOPAT and the book value with the intention of
detail,
(1991).
Stewart
book
For
EVA
the
to
see
more
value.
and
giving more economic meaning
26The cuff ent market value of the firm being valued is basedupon the market's perceptionof the firm's
by
is
figure
the
the
The
numberof shares
price
multiplied
stock
future performance.
simply
equity
debt
lenders.
is
to
figure
debt
the
The
owed
of
outstanding
amount
outstanding.
36
Armed with the above definitions and given that the market value of a
company
be
can expressedin terms of present value of all future cash flows and then in terms of the
book-value
current
of assets-in-placeplus the presentvalue of all the EVAs it is expectedto
in
future,
the
the MVA equation can subsequentlybe written as 0
generate
f
00
MV,
ompany
=II=
FCFF,
BVamels-in-place
(I+ WACC)
1=1
MVA = MVc,,,, -B
w,,y
Vassels-in-place
=ý
00
EVA,
co
+EI
(I+ WACC)
=,
EVA,
(I+ WACC)'
IIOWS. 27
(2.12)
(2.13)
where,
FCFF
free cash flow to the firm
WACC
= weighted averagecost of capital
MVA
= market value added
Wcompany
= market value of company
BV.,, t,= Stem Stewart's adjusted book value of assets-in-place
Stem Stewart argues, correctly, that the present value of all future EVAs constitutes
the crucial difference between the book value of assetsand the market value of the firm
firm's
is
This
the
to
the
as
unrecorded goodwill, or MVA
excess referred
owing
assets.
(O'Hanion and Peasnell, 1998, p.425). The value creation can then formally be linked to
EVA by assessingthe excessof market value over book value as shown in Equation (2.13).
27Seefor exampleO'Hanlon and Peasnell(1998).
37
Thus, maximizing the present value of the future stream of EVA amounts to
exactly the
intrinsic
thing
same
as maximizing
market value added.
As such, MVA is greatly influenced by a firm's EVA performance. If the PV
of
discounted future EVAs turns out to be negative which implies that the firm has
not earned
enough during the years to cover its cost of capital, then the company's value is expectedto
In
if
shrink. contrast, the PV of discounted future EVAs is Positive, then the company will
generate a positive MVA, which will increase the shareholderswealth. The following
the major calculations:
summarizes
00
if
IE
VA
(I+ WACC)
1=1
0 --) MVA >0 --)ýwealth is created
00
if
VA
IE
I
(I+ WACC)
1=1
MVA <04
is
destroyed
wealth
The interpretation of MVA is quite simple. A positive MVA signifies that a firm
has created true wealth for its shareholders,since the company's market value is greater
than the book value of the total capital employed in the business.On the other hand, when
a firm has a negative MVA, its market value is less than the capital that shareholdersand
bondholders invested, meaning that its managers have destroyed capital and squandered
shareholder wealth. From the standpoint of assessing the performance of current
five
in
be
MVA
the
over a period of one year or
years can
more
change
management,
increase
level
invested
MVA.
Thus,
between
to
the
than
the
of
spread
absolute
significant
be
the primary objective of any company concernedabout
capital and market value should
38
its shareholders'welfare (Stewart, 1991). Moreover, as the definitive measureof wealth
in
the
the
MVA
goal
ultimate
wealth
as
creation
and
game;
creation
could be used to
directly comparethe performanceof companiesin different industriesor even different
instance,
For
1998).
MVA
be
(Ehrbar,
could
countries
usedto compare,say,a bank and a
food
toy
manufacturer and a
processor or a steel maker and a software
supermarketor a
doubt,
Without
higher
MVA
the
the
a
one
with
company.
createdmore wealth for its
shareholders.
One of the best ways for companiesto build MVA is to generateconsistentlypositive
EVA. EVA advocatesargue that companiesthat rack up positive EVA year after year should
MVA
their
soar so their shareholdervalue would rise as well. Companiessuch as Cocasee
Cola, GeneralElectric, Microsoft, and Wal-Mart havepositive MVAs becausetheir EVAs are
both positive and are generally growing at an exceptional rate over time. In contrast, firms
having negative EVA reports should see a noticeable decline in their equity values as the
Grant,
firm
intrinsic
1996;
Ehrbar,
1998;
lowers
(Grant,
EVA
the
the
value of
adverse
outlook
2003).
2.3.3 Tobin's Q (or Market to Book Value (MTBV))
Tobin's Q, a value-basedmetric named for its originator, JamesTobin, a Yale
University professor of Economics, has gained broad acceptanceas a measureof corporate
financial
into
decades
its
introduction
the
three
economics
ago
roughly
performance since
39
literature.28 Defined as the ratio of the market value of the firm outstanding financial
securitiesto the current replacementcost of its tangibleassets,Tobin's Q is often usedasa
reliable measureof a company's growth opportunities and its ability to create long-run firm
value. Its attractiveness results from its ability to provide an estimate of the firm's
intangible assets,which include market power, goodwill, future investment opportunities,
high
and
quality management; the greater the value of these intangibles, the greater the
value of Q (Perfect and Wiles, 1994; Tobin, 1969). Thus, changesin Tobin's Q value
important
indicator
provide an
of corporate performance and value creation.
A growing number of empirical studies employed Tobin's Q metric to categorize
companies according to their relative performance. Lindenberg and Ross (1981), for
low
Q ratios as competitive, tightly regulated,or in
example, characterized companies with
dying industries, while companies with high Q ratios tended to have unique products and
factors of production. Likewise, firms with aQ ratio greater than one are judged as using
scarce resourceseffectively; whereasthose with aQ ratio of less than one as using
differently,
be
if
firm's
Tobin's
Q
1.0,
Stated
than
the
should
greater
resources poorly.
its
its
investments
exceeds cost of capital.
return on
Landsman and Shapiro (1995) examined the relationship between Tobin's Q, return
found
is
better
Tobin's
Q
investment
(ROI),
that
a
measureof
and economicreturn; and
on
firm's economic performancethan other accounting-basedmeasures.Tobin's Q is also
firm
is
investigating
for
to
take
tool
over.
a
more
prone
whether
a
gaining popularity as
Lang, Stulz, and Walkling (1991) found that firms with low Tobin's Q are more likely to
" For details, seeTobin (1969).
40
be taken over for purposesof restructuringand increasingvalue. In the literature,Tobin's
definition may be statedas follows:29
Tobin's Q
market value of the firm
R VA
MVCS +L VPS +B VD
R VA
(2.14)
The numerator in the equation (2.14) consists of the aggregate year-end market value of
common stock (MVCS), the liquidating value of preferred stock (LVPS), and the book
debt
(BVD). The denominator [the replacement value of assets (RVA)], is
value of
measured as the dollar outlay needed to purchase the current productive capacity of the
firm at minimum cost with the most modem technologies available.
As an alternative to traditional performance metrics, Tobin's Q has several
adherentsin academia but, largely becauseof the unavailability of data, it still has not been
break
into
to
through
able
practical use (e.g., Damodaran, 2002, p.538). Moreover, Perfect
and Wiles (1994) maintain that, although Tobin's Q is theoretically an attractive corporate
its
is
performance measure,
estimation
subject to considerable measurement error.
Shepherd (1996), for example, notes that, while the numerator supposedly representsthe
is
firm,
the
the
the
only
market value of
common stock commonly used.
market value of
The remaining components are at their book values, or are arrived at using complex and
debatable methods. Similarly, the construction of the denominator is controversial and
biases.
Hence,
combining two
contains an unknown amount of error as well as potential
29See, for example, Perfect and Wiles (1994).
41
imperfect values results in aQ ratio with the possibility of considerablemeasurement
errors.
While the numerator of Tobin's Q ratio is relatively easy to computeusing data
from
databases,
the estimation of the replacement cost of assets(the
readily accessible
denominator) is fairly complicated and, in many cases, hard to obtain due to the
data
(e.
Lewellen
Badrinath
1997). In an attempt to deal with this
of
g.,
unavailability
and
data,
several estimation techniques (proxies) have been proposed.
unavailability of
Lindenberg and Ross (1981), for instance, developed one of the most popular ones. They
divide the firm's assets into three components, namely plant and equipment, inventories,
and other assets,and suggest an appropriate methodology for each. The replacementcost
is
of plant and equipment adjusted to account for four primary effects, including price level
depreciation,
technological changes, and investment in a new
changes, real economic
plant.
While Lindenberg and Ross's estimation technique may be theoretically superior, it
is still difficult to put into practice. Hence, a simplified version has been adopted by a
including
Stulz
(1994)
Perfect
Wiles
(1994).
Lang
and
and
number of researchers
and
Moreover, in practice, analysts often use shortcuts to arrive at Tobin's Q, using market
book
for
debt
the
value of assets
market value of assetsand
value of equity and
as a proxy
for
Q
Tobin's
Thus,
for
this
resemblesthe market-toproxy
as a proxy
replacement value.
42
book value (MTBV) ratio and is shown to be empirically closer to the more complex
Lindenberg and
30
Ross proxy:
B VD +L VPS + MVCS
for
Q=
Tobin's
proxy
B VTA
(2.15)
where,
B VD =book value of debt
L VPS=liquidation value of preferred stock
MVCS = market value of commonstock
BVTA = book value of total assets
2.3.4 Total Shareholder Return (TSR)
Total shareholder return or TSR is another value-basedmetric which measuresthe
for
has
been
for
It
time.
overall return
shareholdersover a given period of
used
many years
by investors and business analysts as a meansof assessingperformance and value creation.
Moreover, TSR target has become an important element in determining executive pay (see
Atrill, 2003, p. 366). It is a comprehensive measurethat reflects all activities or decisions
taken by a management team and as such it has become an increasingly important indicator
for
1997,
48),
Today
(March
Management
2005,
854).
(Arnold,
p.
p.
of managerial success
hearts
"TSR
to
the
the
that
of a
measure of successclosest
reflects
example, pointed out
in
lost
from
investing
have
investors:
they
one set of
actually gained or
what
company's
"
in
than
another.
executives rather
'OSeeChung and Pruitt (1994); and Perfect and Wiles (1994).
43
TSR showsthe total return shareholdersearnedon their sharesover a statedperiod
in
dividend
to
the
time,
addition
stream
of
actual
of
which
paymentsalso includescapital
depreciation
increases
decreases)
(or
in
the share price. For oneany
or
appreciation
31
period TSR:
I
DPSI+l + PPSt+l - PPS,
x 100
PPS/
TSRI
(2.16)
where,
TSRI = total shareholder return
DPSt+l dividend per share at the end of the period
PPS,
the end of the period
share
price
at
+j
PPS, = share price at the beginning of the period (or initial share price)
TSR is thus the most direct measureof changesin shareholderwealth over a given period
of time, expressed in percentage terms (Young and O'Byrne, 2001, p.417). It has the
benefit of being easily understood, and is more "dynamic" in that its values are constantly
being assessedby the market. Furthermore, as no accounting information is included in
this metric one may claim that it is independentof accounting policies (Whittington, 2000,
be
from
having
360).
TSR
to
to worry
p.
easily compared
company company without
can
"Wall
Street
Journal"
bias.
Recognizing
this,
the
publishes a yearly report
about size
TSR.
1000
U.
S.
Scoreboard"
"Shareholder
that
the
companieson
major
ranks
called
Similar to ROI, TSR, despite its appeal as a measure of shareholder wealth
TSR
7).
The
flawed
(Savarese,
2000,
is
calculated or absolute
p.
creation, still considered
" See, for example, Arnold (2002), p. 677.
44
has little information value when taken alone. It does not indicate whether the return
is,
is
for
20%
is
that
one particular company better than 15% for
achieved adequate,
higher
does
TSR
A
not mean that more shareholder wealth has been
another company?
deficiency
be
by
This
can
mitigated
created,
comparing the absolute TSR to a benchmark.
Perhapsthe best benchmark to use is the required return to equity; that is, the opportunity
from
the
returns
cost or
comparable firms operating in the same industry over the same
32
period of time. Thus, to assess performance, the TSR metric should be used in
benchmark
filter
to
conjunction with a
out economy-wide or industry-wide factors. A firm
for
its
creates value
shareholders if the TSR is greater than the required return to equity
(Re), otherwise it destroys value. In symbols,
If TSR > Re --) value is created
If TSR = Re 4 value is sustained
If TSR < Re 4 value is destroyed
2.3.5 The Cash Flow Return on Investment (CFROI)
Cash Flow Return on Investment (CFROI) model is another prominent value-based
33
is
metric that consistent with the principles of wealth maximization. The model is rooted
in the Internal Rate of Retum (IRR) literature and was originally developed by Holt Value
32The reasonthis benchmarkis usually suitable is becauseit comparesthe returnsgeneratedby the firm with
thosegeneratedby other investmentopportunitiesthat havethe samelevel of risk. Other benchmarkswould
be industry averagesand stock market indices such as S&P 500.
3' For a complete and rigorous coverageof this metric, seeMadden (1999).
45
Associates,a Chicago-basedconsultancy and it is now used by several well-known
including
Boston
firms,
Consulting
the
Group (BCG), Price Waterhouse
consulting
Coopers,Deloitte & Touche, and several others (Young and O'Byme, 2001, p.381).
According to Madden (1999, p. 13), CFROI is "an estimate of the real rate of return
firm
its
by
be
thoughtof as a portfolio of projects." It can
on
all
assets,
a
which
can
earned
be obtained by finding the rate of return that equatesthe present value of the gross future
flows
firm's
debt
to
the
cash
available
and equity holders to the gross investment made by
the capital owners. These cash flows are expressedin real (instead of nominal) terms by
for
in
adjusting
period-to period changes the general price level. In fact, adjusting for
inflation is one of the distinctive selling features of CFROI as it facilitates comparisons
acrosstime and acrosscountries.
As the term indicates, CFROI is the rate of return earned by the firm's existing
is
Differently
CFROI
projects.
put,
an IRR-type metric, which measuresthe expectedrate
34
of return over the average life of a firm's existing assets. It is "an IRR measurebut not in
the traditional sense", say Petersonand Peterson(1996, p.26). The CFROI model functions
is
and
normally calculated
as an economic, cash-basedmeasure of corporate performance
inflation-adjusted
be
basis.
It
the
then
cost of capital,
compared with
on an annual
should
COC,35to determine whether a firm has earned returns superior to its cost of capital and
thus created value for its shareholders. If CFROI is greater than the cost of capital
34It is worth noting that this analysiscan be done entirely in nominal terms where the internal rate of return
is a nominal IRR and therefore is comparedto the nominal cost of capital, or in real terms, in which casethe
internal rate of return is a real (inflation-adjusted) IRR comparedto the real cost of capital.
35Inflation-adjusted COC = [(I+ nominal cost of capital) / (I+inflation rate)] -1
46
(sometimescalled the hurdle rate), wealth is created;otherwise,wealth is destroyedif the
CFROI has fallen short of the overall cost of debt and equity capital. In symbols,
If CFRO1 > Inflation-adjusted COC 4 value is created
If CFROI = Inflation-adjusted COC 4 value is sustained
If CFROI < Inflation-adjusted COC 4 value is destroyed
For a particular firm or project, CFROI can be calculated using the following
36
inputs:
i)
The first input is the gross investment (GI) that the firm has in its existing assets,
which is computed by adding back depreciation to the net assetvalue to arrive at an
estimate of the original investment in the asset. The gross investment then is
converted into a current dollar value by adjusting for inflation.
ii) The second input is the gross cashflow (GCF) earned each year over the expected
life of the assets. This is usually calculated by adding non-cash charges such as
depreciation and amortization to the after-tax operating income.
iii) The third input is the expectedlife of the assets-in-place(n).
iv) The non-depreciated assetswhich representthe salvage value (SV) or the expected
life,
in
dollars,
is
final
input.
their
the
the
the
of
useful
current
assets
at
end
value of
36SeeDamodaran(2001), pp.453-454.
47
The CFROI is thus the IRR of the above three cash flows
and can be computedas
follows:
n-
GCF,
Gross Investment (GI) =I-+
(I + CFROI)'
1=1
SV,
(I + CFROI)
(2.17)
CFROI is in fact an efficiency measure that compares future
flows
cash
with the
total investment employed to generate those cash flows. From the viewpoint of its users,
CFROI is considered an informative and fairly useful metric for
evaluating the true
economic profitability of the firm's existing projects. Its usefulness lies in its ability to
become an input into resource allocation decisions since, relative to the cost
of capital, it
very clearly defines which businesses(projects) are profitable and which are not as well as
investment
is likely to createvalue.
where
As CFROI is basedon both current and future cash flows, its advocatesbelieve that
the measureis more closely aligned with shareholderreturn. A study by the Chicago-based
firm, Holt Value Associates,37showed a significant association between CFROI and stock
prices over a 15-year period of analysis. According to this study, there was a 70%
factor
between
CFROI and stock prices, versus 31% for ROA and 44% for
correlation
ROE. On the other hand, there was a zero correlation between earnings growth and stock
hardly
is
has
Holt
Needless
to
the
say,
unbiased and
study
prices.
yet to be examined by
BCG/Holt
CFROI
Furthermore,
that
claims
avoids the
managers.
researchersand money
37"Best practice technique: Focus on CFROI analysis to boost your firm's growth in 2004. "
0843&RQT=309&VName=PQ
http: //proguest. umi. com/pgdweb? did=466955401&sid=I&Fmt--4&clientld=l
D
48
distortions introducedby depreciation.This claim was counteredby Stem Stewarton the
basis that depreciation is implicit in all IRR measures,CFROI included (Stewart, 1994,
71-84).
pp.
It is, however, important to understandthe limitations that CFROI has when usedto
38
In
the academicliterature and popularpress,
performance
and
wealth
creation.
measure
CFROI has been criticised for the following: First and foremost, its method of calculation,
its
EVA,
is
rival measuressuch as
unlike
quite complicated hencemore difficult to explain
to managers. Second, as a form of an IRR, CFROI, by itself, does not provide any
indication as to whether a firm is creating or destroying shareholdervalue. For instance,is
bad?
11%
CFROI
How
has
firm
the
a
of
good or
much shareholder value
created or
benchmark
Without
it
to
a
a company's real cost of capital,
squandered?
or reference
impossible
be
to answer these questions. Third, it requires one to make currentwould
dollar adjustments, which results in a return on investment that is heavily sensitive to the
in
like
Fourth,
EVA,
these
practice, there are many accounting
adjustments.
quality of
firm's
be
CFROI.
However,
the adjustmentsto
that
to
can
made estimate a
adjustments
EVA seem to make it more accurate, thus, more like a cash-basedmeasure; whereas the
Last
CFROI
the
to
to
measuremore understandable.
appear only make
adjustments made
but not least, as CFROI is a non-linear measure,it may create a real communication issue
improve
how
to
For
much would a manager need
example,
among non-financial people.
in
CFROI?
increase
10%
flow
to
the cash
obtain, say, a
" For more details, seefor example,Young and O'Byrne (2001); Petersonand Peterson(1996); Clinton and
Chen (1998); and Myers (1996).
49
2.3.6 The Balanced Scorecard (BSC)
A multi-dimensional framework for corporate performance known as "Balanced
Scorecard", hereafter called BSC was developed and promoted by Kaplan and Norton
(1992; 1993; 1996a; 1996b; 2001). It provides an integrated set of financial and nonfinancial measuresthat gives top managersa fast, but comprehensive view of a business.
The financial measures include several accounting measures that report the results of
have
that
actions
already been taken (lagging indicators); whereas the non-financial
measures encompass operational measures on customer satisfaction, internal Processes,
and the organization's innovation, growth, and learning activities which will eventually
lead to improved financial performance in the future period (leading indicators).
By identifying and integrating both the financial and non-financial indicators of
performance in a cause-and-effect relationship, the BSC becomesnot only a performance
managementtool, but also a mechanism for translating strategy into action. Hence, the
BSC has emerged as a strategic and control system that enablesbusinessunits to evaluate
their operations from at least four different perspectives,by addressingthe following four
72):
1992,
(Kaplan
Norton,
p.
and
questions
1) How do we view shareholders?(Financial Perspective)
2) How do customers seeus? (Customer Perspective)
3) What must we excel in? (Internal BusinessPerspective)
50
4) Can we continue to improve and create value? (Innovation and Learning
Perspective)
Given the above four questions, Hoque and James (2000, pp.2-3) suggest the
following key measuresas indicators for the BSC usage.
9 Financial Perspective - includes profitability such as operating income, retum-oncapital employed, sales growth, generation of cash flow, or economic value added
(EVA);
*
Customer Perspective -
encompassessuch measures as customer satisfaction,
customer retention, new customer acquisition, customer response time, market
share,and customer profitability;
e Internal-Business-Perspective - the key measuresinclude product design, product
development, post-sales service, manufacturing efficiency, quality, etc.; and
9 Learning and growth perspective -measures the ability of employees, information
system, and organisational proceduresto managethe businessand adapt to change.
As Figure 4 shows that the balanced scorecardincludes a mix of outcome measures
or lag indicators and perfonnance drivers or lead indicators. In practice, these indicators
should be seen as a continuum. Kaplan and Norton (1996b, p.31) assumethe following
4
learning
causal relationships: measures of organizational
and growth
measures of
internal business processes 4 measuresof customer perspective 4 financial measures.
For instance, customer satisfaction is a leading indicator of EVA, but it may also be a lag
51
indicator of on-time delivery. In other words, better on-time delivery improvescustomer
leads
higher
in
EVA.
On
hand,
to
turn
the
other
satisfaction, which
while on-time delivery
is a lead indicator of customer satisfaction, it may also be a lag indicator of production
both
the
the manufacturing process and the products
time
quality of
as well as
cycle
themselves. Manufacturing process, product quality, rework rates, and cycle times are, in
turn, lag indicators of employee skills and morale.
Unlike any other accounting or valued-basedmeasure,the BSC does not provide an
for
is
Its
but
to
to
company value.
purpose not measurecompany value,
aggregatenumber
focus management on achieving the objectives that will result in value creation. Despite
theoretical arguments and some empirical evidence favouring the adoption of BSC
implementation
fairly
is
less
the
this
of
sophisticated performance system
worldwide,
2003;
Floque
James
2004;
Speckbacher
Pfeiffer
(e.
Neely
and
and
et al.
straightforward g.
2000; Anand et al. 2005; Ax and Bjornenak 2005). The BSC is essentially a conceptual
defining
have
difficulties
measuresas
model, and as such, researchersand practitioners
they are not clearly established (Ahn, 2001). It can be argued that Kaplan and Norton
(1992,1996) have provided a simplistic picture of complicated world. Therefore, many
balanced
developing
feeling
have
the
the
that,
scorecardmay
the
process of
while
analysts
be useful in identifying the value drivers of the company, the approach is difficult and
it
Its
therefore,
make
complexity and subjectivity,
awkward to measure and maintain.
335).
2001,
Jarrell,
(Morin
p.
and
unsuitable as a compensation criterion
Although the BSC has gained a great deal of attention among corporate managers
little
to
tool,
claims
substantiate
exists
evidence
empirical
measurement
as a performance
52
that it promotes superior financial performance compared to traditional performance
2004;
(e.
Davis
Albright
Maltz
measurementsystems g.
and
et al. 2003). The critics of the
BSC approach also argue that it lacks a long-term perspective; the distinction between
is
it
is
blurred;
difficult
balance
between
to
the financial and
and
achieve
cause-and-effect
for
Norreklit
(2000),
non-financial measures.
example, challenges the rationale of the
assumedcause-and-effect relationship arguing that a cause-and-effectrelationship should
include a time lag between improving customers' satisfaction, learning and internal
improvement
financial
operations, and showing
on
performance. Strack and Villis (2002)
found that the BSC approach thrives in order to identify cause-and-effectrelationship but
the linkages established are mostly qualitative. Furthermore, researchershave noted that
the BSC does not contain a human resourcesperspective which, arguably, is a desirable
dimension
in
(Maltz
strategic
any perfortnance measurement system
et al. (2003).
Nevertheless, the original appeal of the BSC approach for total business performance
it
dimensions
that
measurement was
organized measurement under a small set of
of
businessperformance with which any manager could work, arguably (Kaplan and Norton,
1992).
2.4 The Association between EVA and Shareholder Value
In recent years, academics, corporate professionals, as well as the popular press
have all shown great interest in the use of EVA as a measure of corporate successand
have
EVA-like
EVA
A
measures
adopted
of
or
value creation. growing number companies
The
for
key
and
executive
compensation.
corporate performance
metrics
as their
53
have,
it
is
EVA
to
the most reliable single-period
come
consequently,
realize
proponentsof
indicator of shareholder wealth. Stem Stewart, the promoters of EVA, for example, have
is
it
that
the
superiorto traditional accounting-based
repeatedlyasserted notion
measuresin
have
They
also proposed abandoning EPS, ROE and ROI which
reflecting value creation.
39
be
deem
"misleading
to
they
measures of corporate performance". They went even
40
is
drives
further to contend that "EVA
what
stock prices". As a means of providing
for
Stem
Stewart
in-house
justify
this
to
claim,
conducted several
studies
support
such an
For
Bennett
Stewart
III,
Stem
Stewart & Co., claims
example,
a senior partner of
assertion.
that:
"EVA stands well out from the crowd as the single best measureof wealth creation
is
better
its
basis
[it]
50%
than
almost
closest
accountingon a contemporaneous
...
based competitor in explaining changes in shareholderwealth
[and] as such, it
...
be
internal
financial
adopted with confidence as a company's primary
can
performance metric" (Stewart, 1994, p.75).
However, surprisingly, to date, not enough empirical researchhas been done to support the
few
1998,
210).
The
(e.
Ittner
&
Larcker,
empirical studiesthat
relatively
p.
above claims g.,
have addressed the issue, though, have provided some conflicting evidence about the
Biddle
(eg.,
EVA
et al.,
as a measureof corporate successand value creation
usefulnessof
1997; Chen and Dodd, 1997).
Obviously, therefore, the superiority of EVA over commonly used performance
influential
In
be
issue
to
is
that
an
explored and examined.
ought
metrics an empirical
EVA
(1993)
Tully
that
by
Fortune
and stock prices
pointed out
magazine,
article published
39
SeeStewart(1991), p.66.
40Stern Stewart advertisementin Harvard BusinessReview,November-December,1995,p.20.
54
down
tendency
To
together.
of
moving
up
and
remarkable
a
supporthis assertion,
show
Tully (1993, pp.43-44) quoted JamesMeenan, CFO of AT&T's long-distance firm, saying:
"We calculatedour EVA back to 1984and found an almost perfectcorrelationwith stock
five
later,
in
"
Not
in
the
very
same
author,
years
surprisingly,
another article Fortune
price.
his
is
best
EVA
that
the
assertion
guide to stock prices and that it
magazine, reiterated
better
far
does
EPS
(Tully,
1998).
By
than
the same
with
stock
performance
correlates
token, Victor Rice, Chairman and CEO of Varity, a multi-billion dollar New York-based
diesel
"At
Varity,
EVA
that
components
and
engines, noticed
manufacturer of automotive
has become considerably more than just a yardstick. We fundamentally believe that, over
time, there is a direct relationship between the improvement of EVA and a higher share
for
building
have
EVA
So
our corporate culture and
made
part of our mantra
price.
we
for
1996,
40).
(Rice,
p.
shareholders"
creating wealth
Of course, Stem Stewart has also carried out a number of empirical studies on the
1997;
O'Byme,
O'Byme,
1996;
1994;
(e.
Stewart,
between
MVA
EVA
g.,
and
relationship
Ross; 1997; Uyemura, Kantor, & Pettit, 1996; Ehrbar, 1998). Using the Performance 1000
4
Database,they found that popular accounting based earning measures,including bottomline net earnings after tax, earnings per share (EPS), and earnings growth rate, statistically
It
in
MVA
the
20
same period.
recorded over
Percent of the changes
only 'explain' about
(ROA),
found
return on equity
that the rate of return measuressuch as return on assets
also
(ROE), and return on net assets(RONA), do have more explanatory power, and account
for about 35 percent of the changes in MVA. However, according to Stem Stewart's
55
higher
EVA
than
the
50
all
of
other
measures,
scored
explaining
nearly
analysis,
percentof
2.1).
(see
Table
in
MVA
the variation
In the words of Stem (1996, p.4), why the EVA correlation comes acrossas
into
ROE
RONA,
is
"EVA,
takes
that
or
unlike
account the amount, as well as the
stronger
investment.
[It]
for
distortions
in
GAAP
income
corrects
accounting
corporate
of
quality
balance
sheets,and specifies a minimum or required rate of return that must
statementsand
be earned on capital employed." The fact that EVA explains only 50% of the changesin
MVA may not sound very impressive, but once we have ascertained that no other
in
it
be
MVA;
the
change
must concededthat
performance measurecan explain as much of
EVA is definitely on the leading edge. The studies of Stem Stewart also reveal that each$1
increase in EVA, on average, brings a $9.50 increase in MVA (Ehrbar, 1998, p.78). Of
by
be
have
is
hardly
Stem
Stewart
to
the
money
vetted
studies
yet
unbiased and
course,
managersand researchers.
In another research study, analyzing the computer industry from 1990-95,
Milunovich and Tseui (1996) demonstrated the correlation between MVA and several
found
EVA
They
EVA).
(including
to
financial
frequently
correlate
metrics
other
used
According
to
their
better
MVA
analysis,
than
metrics.
other performance
somewhat
with
for
for
ROE
24%,
EPS
in
MVA.
for
42%
EVA was able to account
growth
of the variation
Uyernura,
for
flow
18%.
Likewise,
Cash
Free
for
25%,
Growth
Flow
Cash
29%, Free
and
Kantor, and Pettit (1996) also studied the relationship between MVA and a variety of
bank
holding
the
largest
100
for
EVA
including
the
over
companies
performance measures
found
They
the
1995.
that,
performance measures,
1986
all
among
through
ten-year period
56
EVA had the strongest correlation to MVA. According to their study, the statistical
between
these
MVA
performance
measures
and
correlation
are: EVA 40%, ROA 13%,
ROE 10%, Net Income 8%, and EPS 6%.
Zafiris and Bayldon (1999) have further contributed to the emerging literature on
EVA/MVA, by improving EVA's applicability as an advance corporate measure over
The
believe
that EVA has the potential to
authors strongly
conventional accounting.
becomethe standard single-period criterion measurefor decision making and performance
for
However,
this to happen, the authors suggest a simple, but rigorous
evaluation.
approach to the EVA calculation based on up-to-date market values of the equity capital
invested in the firm as opposed to book values. Unlike current practice in EVA
measurement,the authors argue that this approach opens up "new ways of estimating
relevant true opportunity costs generally making greater use of benchmarks derived from
the competitive environment of the particular firm, as opposed to the firm
itself.,,
41
Moreover, the authors drawing from the debates and concepts already established within
the framework of neoclassical economics, have successfully put forward in the paper a
for
for
both
decision
(ex
EVA
the
ante) and
making purposes
version of
criterion suitable
(ex
post).
measurementof achievement
Using a sample of 452 firms during the period 1985-1994, Lehn and Makhjia
(1997) examined the relationship between EVA/MVA and stock returns. They found that
EVA
traditional
highly
than
average
other
with
average
with
correlated
stock returns more
(ROE),
(ROA),
or return
equity
return
on
performance measures such as return on assets
41SeeZafiris and Bayldon (1999), p.95.
57
found
In
EVA
(ROS).
they
better
addition,
performed
than accountingsomewhat
on sales
basedmetricsin predicting CEO turnover. Likewise, Worthingtonand West (2004) useda
Australian
I
10
1992-1998
the
to examine whether EVA
companies
over
period
sample of
is more highly associatedwith stock returns than other traditional accounted-based
found
The
that stock returns are more closely correlated with EVA than
authors
measures.
flow,
income,
earnings, and net cash
respectively.
residual
In another attempt to assessthe strength of the MVA and EVA relationship, Grant
(2003) calculated regression statistics between the MVA-to-Capital ratio (dependent
EVA-to-Capital
(explanatory
for
largest
S.
50
U.
the
the
ratio
variable)
wealth
variable) and
linear
he
found
2000.
As
that
expected,
a
relationship
creator corporations at year-end
between
His
these
twin
measures
of
corporate
performance
and
value
creation.
exists
is
large
demonstrated
EVA-to-Capital
the
that
and positive; the
ratio
when
evidence
be
high
Likewise,
MVA-to-Capital
when the
and
positive.
ratio
will
also
corresponding
EVA-to-Capital ratio is low or negative, the corresponding MVA-to-Capital ratio is also
low. These cross-sectional regression statistics reveal a statistically significant relationship
between these two measures of corporate financial success.With an EVA "beta" (slope
S.
for
large
U.
EVA-Capital
3.53,
35.93,
the
wealth
t-statistic
ratio
of
and a
coefficient) of
42
86)
2003,
(Grant,
in
MVA
highly
is
the
p.
equation
significant variable
creators a
.
The
in
MVA-to-Capital
top19%
the
the
among
ratio
that
movement
of
study also reveals
42The predicted MVA-to-capital ratios for theselarge capitalizationfirms were estimated:
MVA/Capital = 3.36 + 35.93 EVA/Capital
(3.53)
(3.49)
(t-value)
Adjusted RA2=19%
N=50 Firms
58
be
by
in
explained
can
contemporaneous
firms
the
end-2000
variations
S.
U.
year
at
ranked
EVA-to-Capital factor.
EVA
to
the
In yet anotherattempt reassess value relevanceof
with respectto other
in
(2004)
Feltham
EVA.
the
et
al.
a
more
recent
study
upheld
use
metrics,
of
performance
They tried to examine whether the results in Biddle et al. (1997) which suggestedthat
integrity
hold
EVA
To
true.
the
preserve
of their analysis,authors
still
earningsoutperform
Biddle
the
et al., except with
exact statistical and econometrics procedures as
replicated
different sets of companies,different time periods, and different markets.The resultsof
their replications, in general, were not consistent with the findings of Biddle et al. Thus,
they disassociatedthemselves from Biddle et al's assertion and concluded that EVA does
in fact beat earnings. However, Feltham et al. did suggest that the debate should be reopened.
Further to this, certain studies have suggestedanother tack -- that EVA is predictive
it
directly
is
However,
to
the
tied
not
of stock returns.
only performance measure
in
by
its
Yet
(e.
Stewart
1991).
again, still
proponents g.,
shareholder wealth as claimed
found
EVA
have
between
and
even
an adverse relationship
other cases, some studies
Chen
566
from
Dodd
Using
1983-1992,
and
companies
a sample of
shareholder wealth.
(1996), for instance, found that return on assets(ROA) explained stock returns better than
EVA with R2 of 24.5%. The R2 for other metrics showed that EVA accounted for
for
ROE
EPS,
for
ROA,
Residual
Income
19.4%;
20.2%;
and
and
approximately
EVA
demonstrated
Their
5-7%.
that
per
and
returns
stock
empirical
results
approximately
from
far
by
however,
EVA
the
touted
was
association
advocates;
as
correlated
are
share
59
further
(1998)
Chen
Clinton
EVA's
compared
and
ability to explain stock returns
perfect.
"traditional
host
reported, residual-based,adjusted, and cash-based"
of other
with a
findings
EVA
is
Their
that
the only measure that does not
proved
also
measures.
consistently reflect stock returns.
Biddle, Bowen, and Wallace (1997) found similar results. Their findings are
in
support of a simple earnings measure. For example, they found that
overwhelmingly
2=
highly
associated with market-adjusted returns (R
earnings are significantly more
2=7.3%),
2=6.5%)
income
(R
EVA (R
flows
12.8%) than with residual
or operating cash
2=2.8%).
(R
In their article, Biddle et al. performed a fairly comprehensive test on the
value relevance of all the components of Stem Stewart's EVA. They broke down EVA into
its component parts as follows:
EVA = CFO + Accruals +A TInt - CapChg + AcctAdj
(2.18)
where,
CFO
flow
from
operations
= cash
Accruals
depreciation
= accounting accruals, such as
ATInt
interest
tax
the
expenses
after
=
CapChg
invested
the
capital
capital charge of all
=
AcctAdJ
(i.
Stewart's
Stem
capital adjustments e., assetre-valuation) and
=
the adjustment of operating profits.
60
The authors examined the relative and incremental information content of each
in
find
EVA
EVA,
to
attempt
an
out
whether
of
component
or any of its components,is
highly
firm
with
stock
returns and
associated
value than accounting earnings,
more
flow
from
income,
found
They
in
that
or
cash
operations.
accounting
residual
earnings,
highest
have
firm
the
association
with
stock
returns
and
general,
value than EVA, residual
income, or cash flow from operations. Moreover, they found that EVA componentsonly
incremental
beyond
insignificant
in
value
accounting earnings
add
explaining stock
Consequently,
findings
they
that
their
conclude
reject the claim that EVA
returns.
dominatesearnings and suggestrather that earnings generally outperform EVA.
Chen and Dodd (1997), likewise, examined the explanatory power of various
EVA
EPS,
ROA,
ROE,
RI,
as well as various
related
accounting measures such as
from
605
1992
Stem
Stewart
1000
Using
taken
the
measures.
a sample of
companies
databaseduring the period spanning 1983-92, Chen and Dodd found that "EVA is a useful
its
by
is
EVA
However,
neither as perfect as claimed
measureof corporate performance.
is
it
to
that
the
a superior stock
a
path
suggests
measure
performance
only
advocates,nor
(p.
319)
"
retum.
2.5 Concluding Remarks
A review of the pertinent literature regarding performance measures and value
is
Particular
the
to
in
used
widely
is
most
six
this
paid
attention
chapter.
creation presented
business
in
the
academic
and
discussed
world
metrics
performance
value-based
and
indicates
bulk
that
be
the
that
evidence
of empirical
literature. It may
existing
concluded
61
EVA's
superiority
over
commonly
used accounting and non-accounting-based
been
fully
has
further
Hence,
not yet
established.
empirical studies
performance measures
highly
issue
in
depth.
this
complicated
more
arewarrantedto explore
62
CHAPTER 3
RESEARCH ISSUES AND HYPOTHESES
3.1 Introduction
The purpose of this study is to empirically test the hypothesis whether there is a
between
EVA and shareholder wealth. Economic Value
statistical
association
significant
Added (EVA), a surrogate for abnormal profit in the economist's sense, has received a
deal
great
of attention as another new single-period criterion for decision making and
performance evaluation (e.g., Zafiris and Bayldon, 1999). It has even been predicted that it
will replace earnings per share (EPS) as the most valuable financial indicator in the Wall
Street Journal's regular stock and earnings reports (Zarowin, 1995). Moreover, it has been
repeatedly portrayed by Stem Stewart and other proponents as the key to creating
shareholderwealth (e.g. Tully 1993; Ehrbar 1999; Grant 2003; Stewart 1991). Hence, it is
important to empirically investigate how much EVA can explain MVA and to find out
whether it is a reliable guide for achieving the goal of being able to maximize shareholder
wealth. Two commonly-used performance measures,namely TSR and Tobin's Q are also
in
highlight
EVA
to
the
vis-a-vis these measures.
of
considered order
value-relevance
The remainder of the chapter is organized as follows. Section 2 presents the
between
(SHV)
link
the
and various
shareholder value
empirical questions concerning
identifies
develops
3
Section
EVA.
including
the main
and
performance metrics,
hypothesis of the study and the associated arguments about the link between EVA and
SHV, and Section 4 concludes.
63
3.2 Research Issues
Academic literature indicatesthat links betweenvariousperformancemeasuresand
(SHV)
however,
this can only be definitively concluded by
are probable;
shareholdervalue
further
empirical tests on these relationships. In order to determine whether
performing
there is any associationbetweenthesemeasuresand the market value of a firm, a direct
link between alternative performance measures and the value created for shareholders
first
be
formulated.
In
firm's
this
the
study,
should
market value added or MVA would
dependent
in
the
thevarious regression models and the regressions' Rvariable
serve as
squares(R) are then used as a gauge of the information's usefulness to the independent
variables.
Several empirical questions concerning the link between shareholder value (SHV)
developed
including
be
EVA
This
will
and examined.
and various performance metrics,
is
intended
to test whether a new value measurementparadigm such as
study primarily
EVA better explains the variation in market value added (MVA) compared to traditional
(TSR)
Tobin's
total
and
shareholder return
value-basedperformance measuressuch as
Thus, this study's analysis consists of three closely related empirical questions.
1)
Does a statistical relationship between EVA and shareholder wealth exist,
be
does,
how
it
if
the
the
shareholder value can
variation of
much of
and
by
EVA?
explained
2)
Does EVA dominate traditional value-based performance measures such as TSR
MVA?
in
Q
Tobin's
explainingcontemporaneous
and
64
3)
Do components unique to EVA, such as net operating profit after tax (NOPAT),
return on invested capital (ROIC), cost of capital (WACC), and total invested
help
(TIC)
in explaining contemporaneous MVA beyond the explanation
capital
by
traditional performance measures?
given
3.3 Research Hypotheses
Generally, in a regression model, the null hypothesis is set up as (HO:Pi = 0). In our
case, this means that the associated explanatory variable, that is, EVA has no effect on
MVA (the dependent variable) and that knowledge of EVA would not help in explaining
the variation in MVA. The alternative hypothesis is set up as (HI: Pi:t 0) which statesthat
the slope of the regression line is not equal to zero; that is, EVA and MVA are linearly
related. This implies that knowledge of the value of EVA does provide information
conceming the associatedvalue of MVA.
To address the previously mentioned research questions, this study examines the
following hypotheses stated in the (alternative form).
3.3.1 Hypothesis One:
Hl:
Economic Value Added is significantly
and positively associated with the
firm's Market Value Added.
This hypothesis directly addressesthe first study's question and examines whether
in
between
Value
Added
Economic
is
and changes
there
a significant relationship
65
The
EVA
is
coefficient
on
metric viewed as the weight that stock
shareholderwealth.
A
indicates
to
this
the
measure.
positive
that EVA is
sign
of
coefficient
market attaches
dependent
Consistent
the
variable.
with prior empirical studies that
associatedwith
(e.
Grant
1996,2003;
Kramer
performance
measures
alternative
g.,
evaluate
and Pushner
1997; Lehn and Makhija 1997), this study uses the association with the firm's Market
Value Added (or MVA) asthe criterion to determinethe bestmeasure.
This study hypothesizes that EVA is strongly and positively correlated with MVA
it
information
in
Market
Value
to
the
the
provides
such
additional
explain
variation
and as
Added of the firm. This study's prediction is consistent with the theoretical valuation
in
finance
and accounting which suggest that various components of residual
models
income should be associated with firm value in a manner that differs predictably in terms
depend
both
the
that
they
on the accounting and
of
sign and magnitude of
association, and
1990;
in
firm
(e.
Livnat
Zarowin
Barth
et
g.,
and
operates
economic environments which a
1999).
al.
3.3.2 Hypothesis Two:
H2:
"EVA dominates value-based performance measures such as TSR and Tobin's Q in
"
MVA.
explaining contemporaneous
in
Q
Tobin's
TSR,
EVA,
This study compares the value-relevance of
and
hypothesized
is
three
the
It
and
that
MVA.
positively
are
metrics
value-based
predicting
MVA.
important
MVA
of
predictors
highly correlated with
and as such could serve as
in
Q
Tobin's
TSR
EVA
and
would outperform
Moreover, the study is also predicting that
66
in
the
variation the market value addedof the firm. This hypothesisis in line
explaining
finding
EVA
is
highly
that
studies
more
with recent
associatedwith stock returnsand firm
income,
than
accrual
earnings,
residual
values
or cash flow from operations (e.g., Feltham
2004;
Makhija
Lnhn
1997;
Worthington and West 2004).
and
et al.
3.3.3 Hypothesis Three:
H3:
Components unique to EVA help in explaining contemporaneous MVA
beyond the explanation given by value-based performance measures such as
TSR and Tobin's
This hypothesis assesseswhether components unique to EVA model such as
NOPAT, ROIC, WACC, and TIC have greater value-relevance (or infonnation usefulness)
over TSR and Tobin's Q in explaining the variation of the firm's market value added.The
rational for decomposing EVA is to examine whether "aggregate" EVA masks much of the
individual
its
usefulnessof
components, and whether the disaggregation of EVA improves
the degree of association with MVA. Prior works suggestthat EVA components add only
beyond
(e.
information
traditional
to
accounting-based measures g.,
content
marginally
Biddle et al. 1997). This study predicts that EVA components are expected to have
incremental value-relevant information beyond that contained in TSR and Tobin's
67
3.4 Concluding Remarks
The preceding chapter (chapter 2) focused on reviewing the theories and the
findings
in
literature
the
of
other
studies
on performance measuresand
empirical
This
has
identified
(3)
hypotheses
link
three
creation.
the
value
chapter
shareholder
about
between EVA and SHV.
These hypotheses and their associated arguments were also
highlighted and discussed. This study hypothesizes that EVA is strongly and positively
it
MVA
infonnation
to explain the
with
and
as
such provides additional
correlated
in
firm.
Market
Value
Added
The study also predicts that EVA would
the
the
variation
of
Q
in
being
in
TSR
Tobin's
to
the
the market value
and
able explain
variation
outperform
firm.
Finally, this study shows that EVA components are expected to have
the
added of
incremental value-relevant information beyond that contained in TSR and Tobin's
68
APTER 4
PJESEARCH DESIGN AND METHODOLOGY
4.1 Introduction
The previous chapter identified and discussed three empirical hypotheses about
EVA and shareholder value creation. This chapter outlines and describes the research
design and methodology used in testing the hypotheses.As well, it introduces the primary
delves
defines
its
into
data
It
the
variables.
also
sources and the specific
model and
link
different
dependent
that
to
the
performance measures
variable of
regression models
MVA. This chapter is structured as follows: Section 2 delineatesthe data sourcesand the
in
In
Sections
3
4,
the primary models to test the
this
techniques
and
study.
used
statistical
in
defined
hypothesis
their
and explained terms of
variables
are presented and
empirical
their theoretical relevance. Concluding remarks are provided at the end of the chapter.
4.2 Data Sources and Statistical Techniques
Two separatesourcesof data have been used:
1) The 2002 US EVA/MVA Annual 1000 Ranking Databasecompiled by
Co.
&
firm
Stewart
Stem
financial
York-based
New
the
consulting
2) The DATASTREAM files.
historical
includes
20
file
is
1000
that
annual
Performance
years of
The Stem Stewart
a
Value,
Market
Capital,
Cost
Capital,
Return
Capital,
NOPAT,
of
data for MVA, EVA,
on
69
CompanyType, Industry Index, and Three-Five- and Ten-year ShareholderReturnsfor
1000 top publicly owned US industrial and non-financial service firms (see Appendix
The data is published on an annual basis and can be obtainedfrom Stem Stewart& Co.,
New York
43
.
Data for MVA along with EVA and its components over the period of 1991-
2002 was taken directly from the Stem Stewart Excel file or calculated using data provided
by this source.Furthermore,to obtain the datausedto estimateTobin's Q valuesandTSR,
the DATASTREAM files were examined for those fiscal years.
This study uses panel data (or sometimes referred as pooled data) to test the
hypotheses.
It can be considered an unbalanced panel data, since not all firms
research
data
for
provide
all years between 1991 and 2002. The panel data analysis is an advanced
analytical technique that captures not only the variations of a single firm over time and
variations of many firms at a given point in time, but the variations of these two
dimensions simultaneously (e.g., Hsiao 2003; Baltagi 2001; Pindyck and Rubinfeld 1998).
This simply means that panel data analysis combines both a cross-sectionaldata (N), and a
time-series data (T) to produce a data set of (N x T) observations; where N can be a
44
firms,
households,
countries, etc.
specific set of
In the last decade or so, panel data analysis has became central in quantitative
behavioural
increased
been
has
Its
science
among social and
greatly
studies.
popularity
literature
in
bodies
innovative
became
it
the
of
most active and
one of
researchersand
43hqp://www. sternstewrt.com
"Panel data usually refers to data which are cross-sectionallydominated;that is, whereN is significantly
larger than T. Such data usually have a fixed T, andthe asymptoticsare in N.
70
45. For economists
econometrics.
and social scientists, panel data sets provide several
distinct advantages over conventional cross-sectional or time-series data
sets. Baltagi
(200 1, pp.5-7), for instance, lists the following advantagesfrom using panel data:
1)
for
individual
heterogeneity;
controlling
2)
data
panel
provide a more informative data set, more variability, less
collinearity among the variables, more degrees of freedom and more
efficiency;
3)
data
better
panel
are
able to study the dynamics of adjustment;
4)
panel data are better able to identify and measure effects that are simply
not detectable in pure cross-sectionor pure time-series data;
panel data models allow us to construct and test more complicated
behavioural models than purely cross-sectionor time-series data; and
6)
panel data are usually gathered on micro units, like individuals, firms and
households.
The data for this study are annual observations,collected over a period of 12 years
firms,
from
1,000
1991-2002.
A
from
on
pooled regression of observations
all 1000 firms
based
both
firms
time
and
period would yield estimates
on
and time periods. With N crossfor
in
data
firms
T
the
total
time
the
periods
number of observations
set
sectional
observed
be
NxT=
will
1000 x 12 = 12000 panel observations. Thus, the pooled data structure
larger
firm-year
number of observationsthan
using
as unit of analysis yield a substantially
is possible with either individual firm time-series or cross-sectionalanalysis.
45 See,for example(Greene,2008; Dougherty,2007).
71
4.3 Model Specification
It is worth noting that the purposeof this study is not to build an elaborate
model
for shareholdervalue, but only to examine and highlight the value-relevanceof
several
performance metrics vis-a-vis
EVA
in predicting shareholder wealth. Hence, a
46
but
sophisticated econometric analysis was not used,
only a combination of univariate
and multivariate regression analysis to perform the required
47
teStS.
The statistical models
in
used this study were an eclectic combination of models used by Biddle et al. (1997),
Chen and Dodd (1997), and Kramer and Pushner (1997). The data for this analysis were
two dimensional with respect to time and cross section. The model used in this study,
therefore, had to include the same dimensions in order to produce a pooled design. All
regressionswere computed using the 'Regression" routine in STATA, version 9.1.
In this study, two regression models were suggested to test the empirical
hypotheses. The first model examines the association between alternative corporate
performance metrics and the MVA as well as highlights the value-relevance of these
in
firm
competing measures explaining
value and shareholderwealth (Hypothesis one and
two).
46A univariate model has only one right-hand-sidevariable.
47It is important to note that multivariate models allow us to estimaterelationswhere two or more
independentvariables affect a dependentvariable. On the other hand,the interpretationof the parametersof
independent
based
the
the
one
of
assumption-that
ceterisparibus
on
any multivariate regressionare
dependent
held
the
the
to
is
variable.
measured
effect
on
constant, produce
variables changed,with all other
For further information, seefor example,Schmidt (2005).
72
IMVAjl
EVA,,
+ ell
+
a,
= ao
MVAj,
+ATSR, + u,
=go
MVAj, = yo + yj Tobin's Q,, + v,,
MVAj, = iro + ir, EVA,,+
; T2
TSR,,+/ 'r3Tobin'sQ,, + V/,,
The dependent variable here is the market value added (MVA) for firm i in period t. The
in
this model are: economic value added (EVA), total shareholder
explanatory variables
return (TSR), and Tobin's Q. Positive and significant coefficients are hypothesized. All
in
variables the above model are scaled by the beginning-of-period total invested capital
(TICt-1)to mitigate heteroscedasticity.
The second model
investigates whether EVA
components can explain
beyond
MVA
that explained by others performance metrics (Hypothesis
contemporaneous
three).
Af VAil = 80 +Aprofitability
spread,, + e,,
AIVA, 80 +AL agged EVA,, + e,
I=
IMVAj,=A+A
total invetsedcapital,,+ e,,
IAlfVA,,= 80 + 81TSR,
IMVA,, =, 8,, +A Tobin'sQ,,+ e,,
JMVAjf=, 60 +Aprofitability
83total
82Lagged
EVA,,
invested capital,,
+,
+,
spread,,
+,84TSR,,+A Tobin'sQj,+ e,,
In this model, EVA is broken down into three componentsin order to evaluatethe
is
dependent
MVA.
The
toward
variable
explaining contemporaneous
contribution of each
73
MVA.
The
explanatory variables are: profitability spread (or EVA spread),48
given as
laggedEVA (LagEVA), total investedcapital (TIC), TSR, and Tobin's Q. All variables
are
defined
and are also scaled (normalized) by lagged total invested capital
as previously
(TICt-1) to mitigate heteroscedasticity. To account for any non-normality in the variables,
the values are expressed in natural logarithms. This model is also estimated using the
least
pooled ordinary
squaresregression and positive coefficients are hypothesized.
4.4 Research Variables
In addition to the dependent variable, Market Value Added (MVA), there are three
independent
Economic
Value Added (EVA), Tobin's Q, and Total
categoriesof
variables:
ShareholderReturn (TSR). The following subsectionsdescribe all of these variables.
4.4.1 Dependent Variable:
The dependent variable chosen for this study is Market Value Added (MVA) -- a
commonly used variable to measure corporate performance and value creation. As
is
developed
by
Stem
Stewart
be
MVA
&
Co.
previously mentioned,
a concept
and may
defined as the aggregate net present value (NPV) of all the firm's activities and
investments. It represents the value created (or destroyed) over the lifetime of a firm and
firm's
is
MVA
for
be
the
the
strategies.
past and current value of
can
seen as a proxy
48Profitability spread(SPREAD) refers to the difference betweenthe return on investedcapital (ROIC), and
by
is
by
dividing
NOPAT
ROIC
(WACC),
total
calculated
the weighted average cost of capital
where
invested capital in the company at the beginning of the year. In literature, the spread between ROIC and
WACC is often referred to as (1) the "residual return on capital," (2) the "surplus return on capital," (3) the
"excessoperating return on investedcapital," as well as, (4) the "EVA spread". SeeGrant 2003, p.23.
74
difference
betweentotal market value and total "economic" book
the
calculatedas
value
(capital). Total market value is defined as an approximationof the fair
marketvalue of a
firm's entire debt and equity capitalization; whereas,total "economic" book
value is
defined as a firm's net assets with some adjustments (Stewart 1991; Stem 1996). This is
in
following
the
expressed
equation: MVA, = MV, - BV,; where MVA = market value
added, MV = total market value of the firm, BV = total 44economicvalue", and the t subdenoting
the time-period.
script
MVA was chosen simply becauseit is a measureof value creation that
reflects the
cumulative wealth created and as such is expected to reflect both tangible and intangible
value. It is superior to simple market value as a performance measurebecauseit removes
the capital employed in the firm away from the cumulative value created to demonstrate
how well management has utilized its resources. One important methodology issue,
though, is whether the level of MVA is influenced by the size of a firm. In order to control
for a firm's size, MVA is scaled by dividing it by the total capital invested in the company
at the beginning of the year (TICt-1) -- a variable that is available from the Stem Stewart
1000
database.
4.4.2 Independent Variables
The independent variables used in our analysis are: Economic Value Added (EVA);
Total Shareholder Return (TSR); Tobin's Q or Market to Book Value (MBV); Net
Operating Profit After Tax (NOPAT), Return on Invested Capital (ROIC), Weighted
Average Cost of Capital (WACC), Total invested Capital (TIC), and Profitability Spread
75
(or EVA Spread). All these measuresare frequently used in practice as corporate
performanceand value creationmetrics.
Economic Value Added: EVA is a measure of true 'economic' profit, or the
by
fall
short of the requiredrate of return that investors
amount which earningsexceedor
investing
in
to
other assetsof comparable risk. A senior partner and
can expect earn when
in
Stem
Stewart
&
Co., G. BennettStewart111,in his 1991book 'The Questfor
co-founder
Value', defined EVA as the difference between a firtn's net operating profit after tax
(NOPAT) and an appropriate charge for the opportunity cost of all capital invested in that
firm (Stewart, 1991). Since traditional earnings-basedmeasuressuch as ROA understate
the cost of capital by ignoring the opportunity cost of equity capital, EVA is designed to
take this into account. EVA is calculated by multiplying the amount of invested capital
(TIC) by the spread between the return on invested capital (ROIC) and the cost of capital
(WACC), which is the required or minimum rate of return a firm must earn to compensate
its investors for the risk they bear (Stem, 1996). This is expressed in the following
*
*
[ROIC
NOPAT
(WACC,
TIC,
)
WACC],
TIC,
EVA,
NOPAT,
where
equation:
=
=
-,
-,;
ROIC
WACC
tax,
average
cost
of
capital,
= return
weighted
=
= net operating profit after
invested
TIC
invested
TICt-1),
(NOPAT/
total
capital, and the t sub-script
=
on
capital =
denoting the time-period.
To properly estimate EVA, the total 'book capital' invested in a company as well as
Stem
Stewart's
(4.1)
be
Table
has
income
to
shows
the after-tax operating
adjusted.
"bottom up" and "top down" approachesto estimating a firm's unlevered NOPAT while
"financing"
in
"asset"
list
the
Table (4.2) shows a
and
equivalent
of potential adjustments
76
49These
firm's
invested
capital.
approachesto estimatingthe
adjustmentsare necessaryto
be
introduced
by
that
anomalies
might
potential
eliminate any
conventionalaccounting
intended
balance
to
produce
and
are
an
adjusted
practices
sheetthat reflects the economic
inherently
historical-costthan
the
more
accurately
assets-in-place
of
conservative,
value
basedbalance sheet guided by GAAP. Like the MVA case, the information about EVA is
from
Stem
Stewart
1000
Database.
the
also obtained
Tobin's Q or Market-to-Book Value (MBV): Tobin's Q is a measureof the real value
by
is
defined
firm
the
the
to the
management and
as
created
ratio of
market value of a
its
because
data,
However,
the
the
assets.
of
unavailability of
replacement cost of
has
been
(e.
"Q"
too
the
value
rendered
complex and cumbersome g.,
calculation of
Damodaran, 2002). Therefore, several proxies for Tobin's Q have been suggestedin the
literature (e.g., Chung & Pruitt 1994; Perfect and Wiles 1994). One approximation that
Ross'
Lindendberg
"Q"
be
the
the
to
to
and
via
value obtained
empirically close
seems
model5o
is
a
proxy
given
by
Chung
and
Pruitt
(1994):
ApproximateQ, = (MVEI + PSI + DEBT,)/ BTA,; where, MVE is the product of a firm's
liquidating
is
PS
the
share price and the number of common stock shares outstanding;
firm's
is
DEBT
the
firm's
the
short-term
value of
outstanding preferred stock;
value of the
debt;
firm's
long-term
book
the
its
the
liabilities net of
value of
short-term assets, plus
49For a more comprehensive discussion of EVA-based accounting adjustments, see Stewart (1991).
50See Lindenberg and Ross 0 98 1).
77
BTA is the book value of the total assetsof a firm; and the t sub-scriptdenotingthe timeperiod.
In this approximation,Tobin's Q is the ratio of the market value of a firm to total
differs
from
Lindendberg
the
as
such
assetsand
and Rossmodel in that approximate
implicitly
assumes that the replacement values of a firm's plant, equipment, and
inventories are equal to their book values. Clearly, the simplified procedures involved in
the calculation of approximate"Q" representa compromisebetweenanalytical precision
and computation (Chung and Pruitt 1994). On the other hand, all the required inputs to
calculate this ratio are readily obtainable from a firm's basic financial and accounting
information, so the DATASTREAM
file has been used as the data source for the
calculationof eachfirm's Q ratio.
Total Shareholder Return: The TSR metric is the most direct measure of changes in
in
shareholder value over a given period, expressed percentage terms. It can be easily
compared from firm to firm, and benchmarked against industry or market returns, without
having to worry about size bias (Young and O'Byrne 2001). Shareholderscan earn a return
dividends
investment
in
their
two
through
on
and through stock price appreciationor
ways:
depreciation. Over a given period of time, t, the total shareholderreturn (TSR) for firm
dividends
]/
DPSjt+
PPSj,
PPSj,;
be
[DPSjl+l
PPSjl+l
TSRj,
+
where
can specified as:
I=
=
beginning
PPSjt
t,
the
t,
the
of
period
per
share
at
=
price
period
end of
per share paid at
file
been
has
The
DATASTREAM
t.
PPSjt+l
the
end of period
and
= price per share at
TSR.
for
data
the
the
of
calculation
source
used as
78
4.5 Concluding Remarks
The purposeof this chapteris to describethe researchmethodologyandthe sources
in
The
first
has
been
dedicated
data
describing
this
that
to
study.
the
section
were
used
of
databases,the sample,as well as the rationale behind the statistical techniquesthat were
implemented in this study. The second section of this chapter specifies the empirical model
investigate
EVA
the
to
usefulness of
as a measure of performance and value
employed
devoted
describing
The
The
to
the
third
measurement
of
variables.
section
was
creation.
following chapter provides descriptive statistics on select variables and reports on and
discussesthe empirical results of testing the researchhypotheses.
79
CHAPTER 5
DATA ANALYSIS AND PRESENTATION
OF STATISTICAL
RESULTS
5.1 Introduction
While chapter 4 introduced the statistical models used in this study on EVA
and
defined their variables, this chapter further studies the relationship between EVA
SHV
and
by testing the proposed statistical models using regression analysis. The empirical analysis
of this thesis focuses on the contemporaneous relationship between MVA and three
commonly used performance metrics with the primary focus being on EVA. Specifically,
this thesis investigated the value-relevance51of these competing performance metrics in
explaining SHV. Therefore, the thesis has provided empirical evidence whether the current
period realization of EVA is more closely associatedwith SHV than are other traditional
performance measuressuch as TSR and Tobin's
This chapter then provides descriptive statistics on selected variables as well as
discusses
from
the
the testing of the research
that
reports on and
empirical results
stem
hypotheses.Starting with descriptive statistics, the distribution of the data in terms of the
been
has
idea
deviations
Further
to
the
this,
the
examined closely.
means and
standard
it
is
by
EVA's
that
a superior measure of shareholder value creation
asserted
proponents
" Also called "information content", seefor exampleBiddle et al. (1995).
80
Finally,
tested
also
empirically.
was
concluding remarks are provided at the end of the
chapter.
5.2 Descriptive Statistics
As previously mentioned, the empirical tests in this study rely on a pooled desig.,
data
the
were analysed by the econometric software named STATA (Version 9.1). The
and
data are annual observations, collected over a period of 12 years of 1,000 firms, from
1991-2002. The dependent variable for this study is MVA and the explanatory variables
are a set of performance metrics including EVA. These variables calculated on a twelfthbasis
year average
resulted in a final usable pooled data sample of 8945 year-firm
observations.
Table 5.1 presents the means and the standarddeviations for the primary variables
in
examined this study. From the Table, it should be noted that while MVA and NOPAT
$5266.249
$401.9223
(about
are positive on average
million and
million respectively), the
level
is
demonstrates
EVA
(-$81.15118
the significance
mean
of
million), which
negative
for
future
implies
EVA.
(WACC)
the
significant growth expectations
of
cost of capital
and
On the other hand, Table 5.2 illustrates the relationship betweenMVA and the independent
between
MVA
The
thus
reveal
a
significant
association
variables.
correlation coefficients
its
EVA
EVA
that
components separately yield
and
variables, suggesting
and all of the
information that is perceived important by the stock market, a rightful claim by EVA
from
is
far
EVA
between
MVA
the
Nevertheless,
the
measure
and
relationship
advocates.
indicates
increasing
EVA
EVA
MVA
between
that
0.6102
and
perfect. A correlation of
81
in
is
that
matters the marketplace since only 37-23% of the variation in MVA
alone not all
52
by
be
the
measure.
explained
can
5.3 Test of Hypothesis
The objective of this study is to test the hypothesis that EVA is highly associated
is
here,
It
MVA.
determinants
but
MVA,
the
though,
to
the
not
purpose
with
explain
of
how
EVA
to
well
acts as a genuine explanatory variable for MVA, in order to
show
only
justify its appropriateness for performance measurement, CEO compensation, financial
As
shareholder
value
creation.
such, sophisticated econometric models or
and
reporting,
been
but
instead
have
a combination of univariate and
not
employed,
adjustments
EVA
to
with other single-period
compare
multivariate regression analysis was used
performance measures.
5.3.1 Hypothesis One
"Economic Value Added is significantly and positively associated with the
firm's Market Value Added. "
Hypothesis I was tested using the following univariate regression model with the
dependentvariable of MVA scaled by beginning-of-year invested capital (MVAjt/TICjt-i)
2)
is a more meaningful measurethan the
(R
determination
52In the regressioncontext, the coefficient of
dependent
in
the
variable
former
the
The
tells
of
variation
(R).
proportion
us
coefficient of correlation
the
to
the
which
(s)
extent
of
therefore
measure
overall
an
provides
explainedby the explanatory variable and
Also
have
does
latter
The
in
note
value.
the
such
not
determines
the
other.
in
variation
variation one variable
(2003).
Gujarati
for
See
(R).
example,
correlation
of
be
the
coefficient
R2
squared
as
that can computed
82
independent
the
and
variable of EVA scaled by beginning-of-year invested
capital
(EVA,-t/TlCit-,).
ß,
ß2
+
sMVAil =
sEVAi, +ei,
(5.1\
where,
N1VAjt= market value added for firm i in period t
sMVAjt =standardized MVA=(MVAit / TICit-1)
EVAit= economic value added for firm i in period
sEVAit=standardized EVA=(EVAit/ TICit-1)
TICit-1--total invested capital for firm i in period t- I
[N(O,
is
eit= a random disturbance term
c'j
This model was estimated using a pooled least square regression. The overall model
yielded a positive and statistically significant coefficient of 10.33 and an R2 of 0.3724 for
the entire sample (see Table 5.3, Panel A). This upholds Hypothesis I that EVA is
positively and significantly related to MVA. The very low p-value (0.000) implies that the
EVA coefficient is statistically significant
for
hypothesis
that
the
to
result
allows
null
-a
be rejected in favour of the alternative hypothesis. Moreover, the positive sign on the EVA
high
indicates
75.34
t-statistics
that EVA has a strong
coefficient along with sufficiently
of
$10.33
increase
in
be
dollar
EVA,
increasein MVA.
MVA.
For
there
effect on
would
each
This should come as no surprise as a number of past empirical tests of the relationship
between EVA and MVA show similar results. For example, in one of Stem Stewart's
83
found
Performance
1000
Database,
EVA
the
to statistically 'explain'
using
studies
was
in
50%
the
of
changes a company's MVA. The research also showed that each $1
about
increasein EVA brings, on average,a $9.50 increasein MVA (Ehrbar, 1998, p.78).
While these results are significant, much of the variation of MVA remains
insight
into
In
EVA
for
MVA,
to
the
strength of
unexplained. order obtain more
as a proxy
least
squares regression was performed with net operating profits after taxes
an ordinary
(NOPAT) as an independent variable:
(5.2)
AsNOPA
Ti,
+ e,,
sMVA,, =,go+
where,
MVAit= market value added for firm i in period t
/
TICit-1)
MVA=(MVAit
sMVAjt =standardized
NOPATit= net operating profit after tax for firm i in period t
/
)
TIC
NOPAT=(NOPATit
it.,
sNOPATit =standardized
TICit-1--total invested capital for firm i in period t-I
[N(O,
disturbance
is
term
a']
random
eit= a
it
A,
5.3,
Panel
Table
Compared
B.
Panel
5.3,
to
can
The results are summarized in Table
in
NOPAT
both
EVA
the
same
is
to
and
MVA
level
be seen that the
related
positively
of
EVA
in
MVA
than
total
the
variation
NOPAT
of
more
However,
slightly
explains
periods.
84
53
does. This suggeststhat the level of NOPAT is not only better
a
proxy, but it is also a
better predictor of corporate performance than the level of EVA.
5.3.2 Hypothesis Two:
"EVA dominates value-based performance measures
such as TSR and Tobin',
in explaining contemporaneousMVA. 11
To test for the incremental value-relevance (also called information
usefulnessor
content) of economic value added (EVA) over the value relevance of total shareholder
(TSR)
Tobin's
Q, the following multivariate regressionmodel was used:
return
and
In MVA,, = flo +Aln
E VAj, +, 62 In TSR,,+, 63 In Tobin's Q,, + e,,
(5.3)
This model was also estimated using a pooled least square regression. The dependent
variable was MVA for firm (i) in period (t); whereas,the explanatory variables were EVA,
TSR, and Tobin's Q. To account for any non-normality in the variables, the values are
in
logarithms.
Both the dependent and the independent variables were
expressed
by
beginning-of-year
invested
heteroskedasticity.
the
to
normalized
capital reduce
Table 5.4, Panel A, shows the estimated coefficients, standarderrors, t-statistics, Findicates
for
(Eq.
5.3)
R-square
that all three performance
this
and
statistic, and
model
in
Q
Tobin's
is,
TSR,
EVA,
are positively associated with changes
and
metrics, that
Q
0.2410,
for
TSR,
Tobin's
EVA,
The
(MVA).
are
and
coefficients
shareholder value
" Since the only difference between EVA and NOPAT is the cost of capital (COC), results favouring
NOPAT may be attributable to mis-estimation by Stern Stewart of the cost of capital (potentially from using
(1997)
Zafiris
for
Kramer
Pushner
See
and
and
example,
a CAPM approach to estimate the cost of equity).
and Bayldon (1999).
85
0.07629, and 0.2897 respectively and all are significant at 5%. To assessor check for
(1991)
Belsley
Belsley
and
et al. (1980) recommend looking at 'the
multicollinearity,
is
condition number' or y, which the squareroot of the ratio of the largestto smallest
characteristicroot:
1/2
max root
(5.4)
min root
Belsley et al. suggest that condition numbers larger than 30 indicate serious
54
larger
imply
100
Some
than
numbers
severe multicollinearity.
multicollinearity, while
55
indicator
linearity.
Factor
(VIF)
Variance
Inflation
the
as an
of multicol
researchersuse
The VIF is a measure of the strength of the relationship between each explanatory variable
be
defined
in
the
as:
regressionand can
and all other explanatory variables
VIFJ =
IR
(I
(5.5)
2)
i
It shows how the variance of an estimator is inflated by the presenceof multicollinearity. If
if
be
1.
As
VIF
thumb,
R,
(ideal
a rule of
will
there is no collinearity
case), then
=0 and
be
linearity
10,
problem may
a severemulticol
the VIF of an independent variable exceeds
(TOL).
Tolerance
is
VIF,
inverse
indicated. Finally, one can use the
called
which
of the
That is,
ToLi =I=
VIFJ
(5.6)
(I - Ri)
54For further details, seeGreene(1993), p.269.
" See,for example,Dielman (2005), pp. 161-164.
86
Thus, when Rj =I
(i. e., perfect collinearity), TOLj =0
and when Rj =0 (i. e., no
TOLj
1.
In
whatsoever),
=
collinearity
other words, the closer TOLj is to zero, the greater
the degree of collinearity of that variable with other regressors.Becauseof this intimate
between
VIF
TOL,
and
connection
researchers,quite often, use them interchangeably.
Examination of the VIF reveals that there is no serious multicol linearity
in
problem
the regression model. As shown in Table 5.4, Panel B, the highest VIF in this model is
(1.28). This suggeststhat, while multicol linearity, exists, it does not pose a problem. Again
in
Table
5.4, the results of this regression not only provided strong
as summarized
direction
the
evidence of
significance and
of the relationships as previously hypothesized;
but also established a baseline by which to analyze the incremental value-relevance of
EVA.
As previously mentioned, the data under study is panel data sometimesreferred as
data
data.
The two
time-series
pooled
and consists of a combination of
and cross-sectional
frequently
Fixed
Effects
Model
(FE)
the
techniques
and the
are
most
estimation
used
Random Effects Model (RE) (see, Wooldridge, 2002). To choose between the fixed or
The
(1978)
Hausman
test
test
the
statistic
was
used.
specification
random-effects models,
is asymptotically distributed as Chi-Squared and the test is based on the Wald criterion
(Greene, 1993, p.480). The null hypothesis underlying the Hausman test is that the fixed
fixed
the
the
effect
alternative,
and random specifications are consistent, whereas under
5.5,
from
Table
be
is
As
the
test
but
is,
seen
can
not.
the random effects model
model
is
freedom
degrees
for
3
than
smaller
57.04
the
of
critical value
and
statistic works out to
87
56
this; it is 7.81.
The Hausman statistic rejects the null hypothesis for our model (equation
5.3) at the 0.05 level, and hence the conclusion is that the random-effects model is not
be
better
fixed-effects
the
would
off
so
we
using
appropriate
model in the value-relevance
tests.
Following the value-relevance literature (e.g., Biddle et al. 1995,1997; Chen and
Dodd 1997; Worthington and West 2004; Bao, and Bao 1998; Feltham et al. 2004),
hypothesis 2 was tested using a two step process. For the first step, the value-relevanceof
is,
EVA,
Q
TSR,
Tobin's
three
that
the
explanatory variables;
and
was evaluated.
each of
To accomplish this, each of these three variables was specified as the explanatory variable
in separateunivariate regressionswith MVA as the dependentvariable:
In MVA,, = ao + a, In E VAj, + ej,
(5.7)
Tobin's Qj, + u,,
=A+Aln
In MVA,, = yo + y, In TSR,,+ vi,
(5.8)
In MVA,
(5.9)
Value-relevance was, then, assessedby comparing R-squares for the three regressions.
EVA
that
displays
Q
the
A,
B,
the results of
Table 5.6 (Panels
regressionsand shows
and
in
information
it
power
has the greatest value-relevance as
possessesthe greatest
has
is
EVA
The
that
MVA.
in
a
significantly
the
observation
main
the
variation
explaining
has
in
Q
Tobin's
TSR.
Q
a
return
and
larger R-square (39.12%) than that of Tobin's
Meanwhile,
(5.70%).
TSR
the
(34.80%)
that
than
R-square
higher
of
significantly
TSR)
Q,
Tobin's
(EVA,
and
positive
are
three
the
variables
of
coefficients
univariate
56Chi-squarecritical values are from Schmidt (2005), p.405.
88
0=0.4931,
(a=0.3325,
t=28.28;
t=39.63; y=0.1202, t=10.53; respectively),
significant
indicating that these variables are relatively reliable predictors of shareholdervalue. These
by
further
the
confirmed
multivariate regression (Equation 5.3) as previously
are
results
stated.
In the second step, a set of tests was conducted to find out which of the three
data
beyond
that provided by
wealth
of
shareholder
provides
value-relevance
predictors
In
these tests, each of the three explanatory variables was paired
other measures.
in
a multivariate regression. For example, the incremental
alternately with each other
for
is
from
both
EVA
TSR
over
obtained
a multivariate regressionwhere
value-relevance
EVA and TSR are specified as explanatory variables:
In MVA,, =, 80 +Aln(EVA,, ) +, 92 ln(TSR,,) + e,
(5.10)
Taking the R-square from this pair-wise regression (Equation 5.10), and subtracting the
individual R-square for TSR obtained in the earlier univariate regression (Equation 5.9),
incremental
Likewise,
TSR.
EVA
the
incremental
over
value-relevance of
yields the
from
is
Q
Tobin's
for
EVA
where
regression
a
multivariate
obtained
over
value-relevance
both EVA and Tobin's Q are specified as explanatory variables:
In AfVA,, =A+Aln(EVA,
I)
Q,,
)
82
In(Tobin'
+ e,,
s
+,
89
(5.11)
Taking the R-square from this pair-wise regression (Equation 5.11), and
subtracting the
individual R-squarefor Tobin's Q obtained in the earlier univariate regression(Equation
5.8), yields the incremental value-relevanceof EVA over Tobin's Q. Similarly, the
incremental value-relevancefor Tobin's Q over TSR is obtained from a multivariate
both
Tobin's
Q and TSR are specified as explanatory variables:
regressionwhere
In MVA,, = 80 + InA(Tobin's
Qj +, 82 ln(TSR,,) + e,,
(5.12)
Taking the R-square from this pair-wise regression (Equation 5.12), and subtracting the
individual R-square for TSR obtained in the earlier univariate regression (Equation 5.9),
incremental
the
yields
value-relevance of Tobin's Q over TSR.
As can be seen in Table 5.6 and 5.7, EVA is the most significant explanatory
by
itself
metric
or when paired with Tobin's Q. The pair-wise combinations that most
in
decreasing
MVA,
EVA/Tobin's
Q (52.93%), EVA/TSR
explain
order of
power, are
(42.11%), and Tobin's Q/TSR (35.66%). Once again, as hypothesized, the comparison of
EVA
the
the
of
metric
evidence
of
relative
value-relevance
regressions provides strong
in
Q
TSR
Tobin's
explaining shareholderwealth.
over
and
The results in Table 5.8 Panel C provide incremental value-relevancetests for the
incremental
Q.
For
Tobin's
TSR,
EVA,
the
valueexample,
and
pair-wise combinations of
R-squares
by
be
the
(36.41%)
the
TSR
EVA
of
comparing
quantified
can
over
relevanceof
EVA
TSR
The
the
and
of
two regressions:
pair-wise comparison
value-relevance of
from
Table
(5.70%)
TSR
B
Panel
5.8
from
the
Table
(42.11%)
value-relevance of
minus
90
5.8 PanelA. Likewise, the incrementalvalue-relevanceof EVA over Tobin's Q (18.13%)
by
R-squares
be
the
of two regressions:The value-relevance
can calculated comparing
of
the pair-wisecomparisonof EVA and Tobin's Q (52.93%)from Table 5.8 PanelB minus
the value-relevance of Tobin's Q (34-80%) from Table 5.8 Panel A.
The pair-wise
(EVA/
TSR)
and (EVA/Tobin's Q) indicate that explanatory power has
combinations of
increasedby 36.41% and 18.13% respectively over the EVA measurealone.
As summarized in Table 5.8, the overall results indicate that EVA exhibits the
largestrelative and incremental information usefulnessover TSR and Tobin's Q. These
results convincingly support the claims made by EVA proponents that EVA outperforms
in
other performance measures explaining shareholderwealth.
5.3.3 Hypothesis Three
"Components unique to EVA help to explain contemporaneous MVA beyond
the explanation given by value-based performance measures such as TSR and
Tobin's Q."
To test for the incremental value-relevance of EVA components over the value
following
Q,
Tobin's
TSR
the
multivariate regressionmodel was used:
relevanceof
and
82
In(total
invested
In MVA,, =A+Aln(profitability
+,
capitalj
sPreadj
Qj
85
In(Tobin's
84
1n
)+
(TSR,,
EVAJ
83
In(Lagged
+ e,,
+,
+,
91
(5.13)
This model was also estimated using a pooled least square regression. The dependent
for
firm
MVA
in
(i)
variable was
period (t), and the explanatory variables were
Profitability Spread (PS), Total Invested Capital (TIC), Lagged EVA (Lagged EVA), Total
ShareholderReturn (TSR), and Tobin's Q. Profitability Spread,TIC, TSR, and Tobin's
defined.
Descriptive
previously
as
are
statistics are displayed in Table 5.1. To account for
in
any non-normality the variables, the values are expressedin natural logarithms.
As reported in Table 5.9, Panel A, the results of this regression indicate a positive
and significant relationship to all of the independentvariables with an overall R-squareof
0.4724. The estimated slope coefficients for profitability spread, TIC, Lagged EVA, TSR,
Tobin's
Q
0.1293,0.3064,0.0481,0.0841,
and
are
and 0.2506 respectively and all are
5%.
Examination
significant at
of the Variance Inflation Factor (VIF) shows that there is
in
no serious multicollinearity problem the regressionmodel. As shown in Table 5.9, Panel
B, the highest VIF in this model is (3.75). This suggests that, while multicol linearity,
it
does
detailed
in
Again
Table 5.9, the results of
exists,
not create a serious problem.
as
this regression not only provided strong evidence of the significance and direction of the
but
baseline
by
hypothesized;
a
which to
also established
relationships as previously
incremental
EVA.
the
analyze
value-relevance of
Here again, to choose between the fixed or random-effects models, the Hausman
(1978) specification test was used. As can be seenfrom Table 5.10, the test statistic works
is
it
freedom
is
degrees
for
5
this;
than
178.86
smaller
of
out to
and the critical value
92
Thus, the Hausmanspecificationtest confirms the superiorityof the fixed-effects
11.07.57
Moreover,
in
the
Table 5.8, the results
model.
random-effects
as
over
summarized
model
indicate
independent
to
the
this
a
significant
relationship
regression
all of
of
variables and
for
incremental
baseline
EVA
the
analyzing
value-relevance
of
components.To
provide a
incremental
broken
EVA
down
into
this
three
value-relevance
question,
was
address
is:
Spread,
Profitability
Total
Invested
Capital,
Lagged
EVA;
that
and
and the
components,
MVA
toward
component
explaining
contemporaneous
was assessed.
of
each
contribution
Following the value-relevance methodology, this hypothesiswas tested using a two
five
is,
First,
that
the
the
explanatory variables;
value-relevance of each of
step process.
Profitability Spread, Total Invested Capital, Lagged EVA, TSR, and Tobin's Q was
the
To
these
this,
as
explanatory
specified
was
variables
each
of
accomplish
evaluated.
dependent
MVA
in
the
variable:
as
variable separateunivariate regressionswith
In MVA,, = oto+ a, In profitability spread,, + e,,
(5.14)
InMVA,, =, Oý+AIn total invested capital,, + e,,
In MVA,, = yo + 7, In Lagged EVA,, + e,,
(5.16)
In MVA = 90 + 15,In TSR + e
(5.17)
In MVA,, = 7ro+ 7r, In Tobin's Q,, + e,,
(5.18)
57Chi-squarecritical values are from Schmidt (2005), p.405.
93
Value-relevancewas, then, assessedby comparing R-squaresof the five regressions.Table
5.11 (Panel A, B, C, D, and E) presents the results and shows that the profitability spread
has the greatest value-relevance-that
is, it possess the greatest information power in
in
MVA.
The
the
the
variation
main observation was that the profitability
explaining
higher
has
R-square
(38.65%)
than that of Tobin's Q (34.80%) and
a
significantly
spread
TSR (5.70%). Tobin's Q in return has a significantly higher R-square (34.80%) than
Lagged EVA (30.20%) and TIC (14.09%).
In the second step, a set of tests was performed to find out which of the five
data
beyond
that provided by
predictors of shareholder wealth provides value-relevance
In
five
these
tests,
the
each of
other measures.
explanatory variables was paired alternately
in
incremental
For
the
value-relevance
with each other a multivariate regression.
example,
for the profitability spread over Tobin's Q was obtained from a multivariate regression
both
Q
Tobin's
the
were specified as explanatory variables:
profitability spreadand
where
InMVAj, =, go +Aln(profitability
Qj,
)
82
In(Tobin's
)
+ e,,
+,
spread,,
(5.19)
Taking the R-square from this pair-wise regression (Equation 5.19), and subtracting the
individual R-square for Tobin's Q obtained in the earlier univariate regression (Equation
5.18), yielded the incremental value-relevance of profitability spread over Tobin's
TSR
for
the
was
Likewise, the incremental value-relevance
profitability spread over
TSR
both
were
and
spread
from
profitability
where
a multivariate regression
obtained
specified as explanatory variables:
94
In MVA,, = 60 +Aln(profitability
spreadj +, 82 ln(TSR,,) + ei,
(5.20)
Taking the R-square from this pair-wise regression (Equation 5.20), and subtracting the
individual R-square for TSR obtained in the earlier univariate regression (Equation 5.17),
incremental
the
yielded
value-relevance of profitability spread over TSR. Similarly, the
incremental value-relevance for profitability spread (PS) over TIC was obtained from a
multivariate regression where both PS and TIC were specified as explanatory variables:
InMVA,,= 80 +A ln(profitability spreadj +,62In(TICj + e,,
(5.21)
Taking the R-square from this pair-wise regression (Equation 5.21), and subtracting the
individual R-square for TIC obtained in the earlier univariate regression (Equation 5.15),
incremental
TIC.
the
yielded
value-relevance of profitability spread over
Also, the
incremental value-relevance for profitability spread (PS) over Lagged EVA was obtained
from a multivariate regression where both PS and Lagged EVA were specified as
explanatory variables:
InMVA,, =, go +Aln(profitability
82
In(Lagged
EVAJ
+ e,,
+,
spreadj
95
(5.22)
Taking the R-square from this pair-wise regression (Equation 5.22), and subtracting the
individual R-square for Lagged EVA obtained in the earlier univariate regression
(Equation 5.16), yielded the incremental value-relevance of profitability spread over
Lagged EVA. Similarly, the incremental value-relevancefor TIC over Tobin's Q was
from
both
TIC and Tobin's Q were specifiedas
a
multivariate
regression
where
obtained
explanatoryvariables:
In MVA,, = 80 +AIn(total
invested copitalj +, 82 In(Tobin's Qj + e,,
(5.23)
Taking the R-square from this pair-wise regression (Equation 5.23), and subtracting the
individual R-square for Tobin's Q obtained in the earlier univariate regression (Equation
5.18), yielded the incremental value-relevance of TIC over Tobin's Q.
Also, the
incrementalvalue-relevance for TIC over TSR was obtained from a multivariate regression
both
TIC
where
and TSR were specified as explanatory variables:
In MVA,, = 60 +, 8, In(total invested capitalj +, 82 ln(TSR,,) + e,,
(5.24)
Taking the R-square from this pair-wise regression (Equation 5.24), and subtracting the
individual R-square for TSR obtained in the earlier univariate regression (Equation 5.17),
TSR.
TIC
incremental
over
value-relevance of
yielded the
Similarly, the incremental
from
Q
Tobin's
EVA
multivariate
a
for
Lagged
obtained
was
over
value-relevance
96
both
Lagged
EVA
where
regression
and Tobin's Q were specified as explanatory
variables:
In MVAj, =, 80 +Aln(Lagged
EVAJ +, 82 In(Tobin's Qj + e,,
(5.25)
Taking the R-square from this pair-wise regression (Equation 5.25),
and subtracting the
individual R-squarefor Tobin's Q obtainedin the earlier univariate
regression(Equation
5.18), yielded the incremental value-relevanceof Lagged EVA over Tobin's Q. Similarly,
the incremental value-relevance for Lagged EVA over TSR was obtained from a
multivariate regression where both Lagged EVA and TSR were specified as explanatory
variables:
In MVA,, = 80 +, 81 1n(L aggedE VA,,)+ 82 ln(TSR,,) + e,,
(5.26)
Taking the R-square from this pair-wise regression (Equation 5.26), and subtracting the
individual R-square for TSR obtained in the earlier univariate regression (Equation 5.17),
yielded the incremental value-relevance of Lagged EVA over TSR.
Finally, the incremental value-relevance for TIC over Lagged EVA was obtained
from a multivariate regression where both TIC and Lagged EVA were specified as
explanatory variables:
97
In MVA,, =, 80 +Aln(total
invested capiral,, ) +, 82 In(Lagged EVAJ + e,,
(5.27)
Taking the R-square from this pair-wise regression (Equation 5.27), and subtracting the
individual R-square for Lagged EVA obtained in the earlier univariate regression
(Equation 5.17), yielded the incremental value-relevanceof TIC over Lagged EVA. Also,
the incrementalvalue-relevancefor TSR over Tobin's Q was obtainedfrom a multivariate
both
TSR
Tobin's
Q were specified as explanatory variables:
and
regressionwhere
In MVA,, = flo +Aln(TSRi,
) +, 82 In(Tobin's Qj + e,,
(5.28)
Taking the R-square from this pair-wise regression (Equation 5.28), and subtracting the
individual R-square for Tobin's Q obtained in the earlier univariate regression (Equation
5.18), yielded the incremental value-relevanceof TSR over Tobin's
Table 5.12 (Panel A, B, C, D, E, F, G, H, 1, and J) displays the results of the pairB,
in
Panel
A
Table
5.13
As
EVA
the
and
summarized
components.
wise regressions of
is
indeed
drivers
EVA,
the
(PS),
the
most
the profitability spread
of
primary
one of
(43.11%).
Q
Tobin's
itself
(38.65%)
by
or when paired with
significant explanatory metric
The pair-wise combinations that most explain MVA, in order of decreasingexplanatory
EVA
PS/Lagged
(42.77%),
Q
EVA/Tobin's
%),
Lagged
(43.11
Q
power, are PS/Tobin's
TSR/Tobin's
Q
(37.84%),
TIC/Tobin's
(37.94%),
PS/TSR
(40.30%), PS/TIC (40.29%),
TIC/TSR
(28.44%),
EVA
TIC/Lagged
and
(35.66%), Lagged EVA./TSR (31.56%),
further
the
of
evidence
provides
(15.95%). Here again the comparison of regressions
98
EVA
TSR
Tobin's
Q in explainingshareholderwealth
of
over
value-relevance
and
relative
hypothesised.
as
Furthermore, Table 5.14 presentsthe incremental value-relevance
results. In fact, it
hypothesis
Equation
(5.13) that profitability spread (PS), total
tests
the
of
provides
invested capital (TIC), lagged EVA (Lagged EVA), TSR, and Tobin's Q have equal
incremental value-relevance, that is, equal explanatory power. Taking the R-square from
in
Table
5.13
Panel
B, and subtracting the R-squareobtained in
regression
pair-wise
each
the earlier univariate regression (Table 5.11) yielded the tests for incremental valuein
For
Table
5.14 ProfitabilitySpread / TSR (32.24%) is equal to the
example,
relevance.
relative value-relevance of the pair-wise comparison of ProfitabilitySpread and TSR
(37.94%) from Table 5.13 Panel B minus the individual value-relevanceof TSR (5.70%)
from Table 5.13 Panel A. Thus, the explanatory power has increasedby 32.24% due to the
ProfitabilitySpread measure. Finally as hypothesised, value-relevance tests once again
its
TSR
MVA
be
EVA
than
to
to
or
components
reveal
and
more closely associated
Tobin's
5.4 Concluding Remarks
detailed
findings
Chapter 5 combines the research
and analysis and presents a
in
discussed
the
by
the
them
discussion
ones
main
with
comparing
critical
of these results
from
firm-year
12,000
taken
data
literature review. Using a sample of panel
observations
of
1199
files
the
database
period
over
and the clatastream
the Stem Stewart 1000 EVA/MVA
function
is
of
a
2002, this study has found compelling evidence that shareholder value
99
EVA. It also substantiates other evidence that EVA outperforms other traditional
in
in
the
cumulative
change shareholderwealth. Valueperformance measures explaining
be
highly
EVA
to
tests
more
associatedwith shareholderwealth than TSR
reveal
relevance
Q.
Tobin's
and
Incremental tests have also suggested that EVA possessesthe largest
information
TSR
(or
Tobin's
Q.
All
these results
over
usefulness)
and
power
explanatory
by
EVA
EVA's
the
made
proponents
claims
of
usefulness as an
conclusively support
internal and external corporate performance measurement.
100
CHAPTER 6
CONCLUSIONS, LIMITATIONS,
AND FUTURE
RESEARCH
This chapter summarizes the maj or findings of this thesis, discusses its
identifies
limitations,
and
research
contributions,
as well; it offers some thoughts about
for
future
research.
opportunities
Over the last two decades,a dramatic change has occurred in the way corporations
Globalization,
technological changes, ownership concentration,
are run or operate.
information
the
accountability,
revolution including the internet, as well as the ever
increasing sophistication of the financial markets have become the primary forces behind
the transformation of corporations and the climate in which they operate. Companies
but
this
the
to
to
also to
new climate,
around
globe are under great pressurenot only adapt
in
in
perform consistently well
all markets
which they compete - namely, the product
levels;
do
If
they
labour
they
the
not adapt on all
capital market.
market, and
market, the
being
have
face
be
forced
taken over.
bankrupt
the
threat
to go
of
or will
will
All the above mentioned, but in particular, the increasein ownership concentration
for
increased
have
investors
institutional
the
hands
stage
set
of
of common shares in the
toward
their
shareholderconcerns.
to
efforts
refocus
pressure on corporate management
Today, academics, business professionals, and stock market analysts widely agree that
business
financial
is
a
of
objective
the
vital
most
maximizing shareholder wealth
101
divergent
However,
enterprise.
widely
opinions exist as to how this value can be identified,
measured,and ultimately, optimized.
For awhile now, the traditional accounting measuresof corporate
performancesuch
as ROA, ROE, and EPS are meeting up with ever increasing criticism and dissatisfaction.
Opponentsargue that these measuresprovide a relatively poor guide to shareholder
value.
Rappopart's pioneering work (1986,1998) that focused on shareholder value took into
account the shortcomings of the traditional accounting measures,thus preparing the way
for a value-based management (VBM)
approach. This new approach has gained
it
widespreadapproval as outlines two important propositions: first, that shareholdervalue
is
the primary corporate objective, and secondly, that economic income of a
creation
by
its
EVA, is the primary measure of corporate performance
company, as expressed
(Davies, 2000, p. 38).
Shareholder value has thus long been the theme of the financial economist. Studies
show that companies thrive when real economic value is created for their shareholders
(e.g., McKinsey et al., 2005; Copeland et al., 1996; Rappopart, 1994,1998; McTaggert et
happen
if
1994).
Yet,
this
corporations are capable of making strategic and
al.,
can only
If
in
they
decisions
their
are
that
capital.
cost
of
of
excess
operating
will yield a return
Therefore,
benefit
is
to
there
society.
an added
capable of carrying this out; of course,
fundamental
These
be
principles
part of any company's culture.
value creation should
long
for
the
the
been
time,
have
recent
of
events
and
a
around
concerning value creation
directors,
boards
When
in
of
them.
have
managers,
conviction
our
past
only strengthened
be
detrimental
the
to
overall
the
can
forget
truths,
investors
consequences
these
simple
and
102
operation of the company and society, in general. Let's look back over the last 30 or so
Consider
the 1970s, with the rise and fall of big businessconglomerates; the 80s
years.
hostile
in
the
takeovers
the United States;the 90's with the collapse of Japan'sbubble
with
economy and the SoutheastAsian crisis; the Internet bubble breaking; as well as the
corporate governance scandals; and last, but not least, consider the ongoing mortgage
crisis.
Performance measurement, like many other subfields in corporate finance and
has
had numerous controversies and debates on issues
management accounting,
its
its
theory,
surrounding
methodologies, as well as the implementation of its findings.
The issue of whether Economic Value Added (EVA), a variant of residual income, is
highly correlated with the market value of the firm as its proponentsclaim has beenmired
in ongoing theoretical and methodological controversy. The primary motivation for this
desire
from
for
to
the
the value-relevanceof
study stemmed
Provide empirical evidence
EVA vis-a-vis other value-based performance metrics in predicting shareholderwealth.
The secondary motivation was due to the recent interest in the theory and application of
business
firms,
by
money managers,
academics, consulting
value-based metrics shown
in
analysts,and corporate executives evidenced the context of the ever growing prominent
finance and accounting conferences,publications, and other professional meetings.
interrelated
develop
three
draws
to
The study
upon extensive prior research
to
is
EVA
hypothesize
related
I
hypotheses.
First,
that
positively and significantly
research
103
58
Second, I hypothesize that EVA is
Market Value Added (MVA).
more highly associated
MVA
than other commonly-used value-basedperformancemeasuressuch TSR
with
as
and
Tobin's Q. Third, I hypothesize that components unique to EVA help in
explaining
beyond
MVA
that explainedby TSR andTobin's
contemporaneous
Contrary to what other studies (e.g., Biddle et al. 1997; Chen & Dodd 1997)
findings
the
concluded,
of this study show that EVA dominates value-basedperformance
TSR
such
metrics
as
and Tobin's Q in its association with shareholderwealth. In this
EVA,
TSR, and Tobin's Q were treated as competing value-basedperformance
study,
measuresand a multivariate regression model was run using a sample of panel data of
12,000firm-year observations covering the period 1991-2002obtained from Stem Stewart
DATASTREAM
described
in the preceding chapters. The value-relevancetests
and
as
revealed that shareholder value (or MVA) is indeed more closely associatedwith EVA
than TSR and Tobin's Q. The analysis of these regressionsindicates that the relationship
betweenEVA and MVA. is significant and that EVA exhibits the largest explanatorypower
in
fact,
In
EVA
the
among
measures.
was significant alone the univariate regressionsand
in
Q
incrementally
in
Tobin's
TSR
the
was
or
combination with
value-relevant
by
These
the
therefore,
claims made
multivariate regressions.
persuasively support
results,
EVA advocatesthat it outperforms other performance measuresin explaining shareholder
wealth.
lifetime
the
the
of
MVA)
(or
the
Added
over
Market
created
value
represents
value
previously stated,
firm.
the
the
for
firm and can be seen as a proxy
strategies of
the past and current value of
5' As
104
Overall, the findings in this study are broadly
comparable to prior studies
information
the
usefulness of EVA, including O'Byrne (1996), Bao & Bao
supporting
(1998), Worthington & West (2004), Zafiris and Bayldon (1999), Lehn
and Makhija
(1997), Grant (2003), and Feltharn et al. (2004), among others. However, the disparity
between the findings of this study and that of others requires explanation. It is
thought
likely that this can be attributed to two major possibilities:
o
differences in researchdesign and methodology; and
o
differences in the accounting principles and variables definition.
This study extends prior studies on the relationship between value-based
performance metrics and shareholder value creation. The objective of this study was to
empirically examine the hypothesis that EVA is highly associatedwith MVA. The purpose
of the study, though, was not to fully explain the determinantsof MVA, but only to show
how well EVA acts as a genuine explanatory variable for MVA, in order to justify its
for
financial
CEO
appropriateness
performance measurement,
compensation,
reporting,
Two
and shareholder value creation.
more commonly used value-based performance
Tobin's
Q
(TSR)
is,
Shareholder
Return
Total
were also consideredto
and
metrics-that
highlight the value-relevance of EVA vis-a-vis these measuresin predicting shareholder
wealth.
This study will contribute to the growing literature on performancemeasurementas
it made use of pooled time-series cross-sectionaldata, which certainly allows for greater
first
is
Moreover,
the
EVA.
the
study
study
current
the
usefulnessof
empirical certainty on
EVA,
four
data
metrics-namely,
performance
I
to
value-based
on
of which am aware use
105
MVA, TSR and Tobin's Q and covers a more recentperiod in the
contextof corporate
performanceand shareholder value creation. Thus, this study provides evidencethat
would
prove useful to policy makers who are interested in EVA as a replacement
or a
complementto traditional accounting-basedperformancemetrics for their decision-making
and compensationpurposes.
However, this study is not without some limitations. Initially, it
intended
that it
was
would consist of all the five prominent value-basedmetrics-that is, CFROI, SVA, TSR,
Tobin's Q, and EVA. But due to a lack of data, the first two metrics were droppedfrom the
limiting
it
to just three performance metrics. Also, it was not the goal of this study to
study,
how
firms
explore
achieved their levels of EVA or to detail how firms should go about
increasingtheir EVA level to deliver higher levels of market value added. Such research
would be dramatically essential, but is beyond the scopeof the measurespublicly available
at this time. The results presented in this thesis have, though, provided some necessary
insight into the value-relevance of
EVA
vis-a-vis commonly-used value-based
performancemeasures.However, several other issueswould have to be consideredfurther
in order to develop a more complete understandingof what factors drive shareholdervalue.
Rather than replicating current studies with slightly different settings, future research
financial
be
include
to
and non-financial metrics such as customer
should expanded
more
loyalty, R&D, employee satisfaction, IT, and productivity measures,to mention only a
few.
106
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Information
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APPENDICES
Appendix A: Figures
Appendix B: Tables
Appendix C: The 2002 Stern Stewart Performance 1000
116
Appendix
A
FIGURE I
THE SHAREHOLDER
CORPORATE
OBJECTIVE
Shareholder
Value Added
(SVA)
Cash Flow from
Operations
VALUATION
COMPONENTS
VALUE
DRIVERS
VALUE ANALYSIS NETWORK
Value
Growth
Duration
Sales
Growth
"
Operating
Profit
"
Margin
Income
Tax
Rate
"
MANAGEMENT
DECISIONS
Shareholder Return
Dividends
Capital Gains
Discount
Rate
Working
Capital
Investment
Fixed Capital
Investment
Investment
Source: Rappaport (1998), p. 56.
117
Debt
Cost of
Capital
Financing
FIGURE 2
A TYPICAL
FINANCIAL
MANAGEMENT
FINANCE)
SYSTEM (FUZZY
Source: G. Bennett Stewart, 111,Focused Finance.
http: //www. valuationissues. com/valiss/serviet/Viewarticle? articlelD=95
118
FIGURE 3
EVA: A Simplified and
Focused Financial
Management System
Source: Adopted from Morin and Jarrell, P-46
119
FIGURE 4
Balanced Scorecard: Outcome Measures & Performance Drivers
CausalChain
inand
Lagong
Customers
Internal
Business
Process
Leading
Learning
and
Growth
(2004),
&Smith
Fletcher
Source:
P-5
120
Atmendix B:
TABLE 2.1
HOW PERFORMANCE
MEASURES "EXPLAIN"
MVA
Variable/Model
CHANGES IN
R2
Growth in Sales
10%
EPS and NI
15%-20%
ROA, ROE, RONA
35%
about
EVA
50%
Source: Stewart (1994), p.75.
121
TABLE 4.1
CALCULATION
OF NOPAT FROM FINANCIAL
DATA
A. Bottom-up approach
Begin:
Operating profit after depreciation and amortization
Add:
Implied interest expenseon operating leases
Increasein LIFO reserve
Increasein accumulated goodwill amortization
Increasein bad-debt reserve
Increasein capitalized researchand development
Increasein cumulative write-offs of special items
Equals:
Adjusted operating profit before taxes
Subtract:
Cash operating taxes
Equals:
NOPAT
B. Top-down
roach
Begin:
Sales
Subtract:
Cost of goods sold
Selling, general, and administrative expenses
De reciation
Add:
Implied interest expenseon operating leases
Increasein LIFO reserve
Other operating income
Equals:
Adjusted operating profit before taxes
Subtract:
Cash operating taxes
_Equals:
NOPAT
III, I 11c;
%qu%',
)LJL%JJL
I
Note: Table based on information in (j. tienneu 3LCWdFL
York: Harper Collins, 1991).
122
TABLE 4.2
CALCULATION
OF CAPITAL
USING ACCOUNTING
FINANCIAL
STATEMENTS
A. Asset approach
Begin
Net (short term) operating assets
Add:
LIFO reserve
Net plant and equipment
Other assets
Goodwill (Intangibles)
Accumulated goodwill amortization
Presentvalue of operating leases
Bad-debt reserve
C italized researchand development
Cumulative write-offs of special items
Equals:
Capital
A Sourceoffinancing approach
Begin:
Book value of common equity
Add equity equivalents:
Preferred stock
Minority interest
Deferred income tax reserve
LIFO reserve
Accumulated goodwill amortization
Add debt and debt equivalents:
Interest-bearing short-term debt
Long-term debt
Capitalized lease obligations
Presentvalue of noncapitalized leases
Equals.
Capital
_Note: Table based information in G. Bennett Stewart III, ine yuest ior value klNcw
on
York: Harper Collins, 1991).
123
TABLE 5.1
DESCRIPTIVE STATISTICS OF VARIABLES EMPLOYED
IN THE REGRESSION MODELS
Mean
Variable
MVA
EVA
NOPAT
overall
5266.249
within
13329.41
-167248.8
423189.8
n=
1000
T-bar
=
9.532
8358
N=
9578
between
665.9038
-7602
4312
n=
1000
within
687.4061
overall
between
401.9223
overall
between
overall
between
overall
between
overall
between
overall
between
overall
between
overall
between
within
-24906.6
1116.824
589.4312
.
2588763
.
.
.
8.405437
-3121.9
.
.
.
0921327
.
.
T-bar
9.889
3.850578
n=
914
8177131
-4.37565
40.87497
525.884
-6108.15
49898.73
N=
9497
-500.13
8626.205
n=
936
-8664.77
41280.93
-7.86567
-. 63312
21.57341
= 10.1464
9578
N=
4.149515
n=
3194024
3195998
1663764
2695485
0241721
0216499
0092914
-81.13532
1000
-. 606695
6526.184
.
n=
3386405
.
13470.59
.
9889
8954
11586.65
.
9938.506
N=
N=
.
2690804
0933339
13073.25
9.578
44.46667
166963
5796.468
18723
=
8658269
477.7714
.
T-bar
-21325.18
-. 938144
284.1693
0015204
9583.849
-24849
1014.2
within
lagEVA
9532
-29732
-81.15118
within
WACC
N=
952.4533
overall
within
ROIC
Observations
505162
-72667
188466.5
within
TIC
20431.39
Max
-9778.25
within
SPREAD
Min
14906.85
within
TobinQ
Dev.
between
within
TSR
Std.
.
952.5018
588.7881
741.8563
-10.05144
17.42542
-1395
-534.9167
-51475.03
=
T-bar
T-bar
=
9.7965
1000
T-bar
=
9.578
233490
N=
10016
116989
n=
1000
172904.1
T-bar
=
10.016
-7.78067
-. 49786
21.67341
N=
9578
4.227182
n=
1000
-9.956298
042
.
05125
.
0383593
.
-29732
17.53956
-7758.75
-25692.14
.
.
T-bar
=
9.578
188
N=
9845
173
n=
1000
.
129466
T-bar
=
9.845
8358
N=
9577
3805
n=
1000
9199.948
T-bar
=
9.577
Variable Definitions:
Shareholder
TSR=Total
Added;
Value
MVA=Market Value Added; EVA=Economic
Invested
TIC=Total
Spread;
EVA
Return; TobinQ=Tobin's Q; SPREAD=Profitability or
Capital;
Cost
Average
WACC=Weighted
of
Capital; ROIC=Retum on Invested Capital;
lagEVA=Lagged Economic Value Added
124
TABLE 5.2
CORRELATION BETWEEN VARIABLES
This table reports Pearson correlation coefficient between all variables
used in the
analysis
A
EVA
TSR
TobinQ
SPREAD
TIC
mv
EVA
0,6102
TSR
0.0346
TobinQ
0.1210
-0.0028
0.0488
0.01977
SPREAD
0.1683
0.1351
0.03265
0.
TIC
0.5541
0.8840
0.0572
0.0622
0.0731
lagEVA
0.0345
0.0148
0.0090
0.0002
0.1550
Thesecorrelations are estimated using 9532 observations.
SeeTable 5.1 for all variable definitions.
125
04
lagEVA
TABLE 5.3
HYPOTHESIS (1)
UNIVARIATE REGRESSION RESULTS
Panel A
IsMVA,
Model:
go
VA, + e,,
+AsE
=,
l
Statistic
Numberof Observations
9449
DependentVariable
sMVA
IndependentVariable
sEVA
R-Squared
0.3724
Coefficients:
Constant
3.364659
Std. error
0.4932272
95% C.I.
2.397813/4.331505
IndependentVariable (sEVA)
10.32568
Std. error
0.1370467
95% C.I.
10.05704/10.59433
t-statistics:
Constant
6.82
IndependentVariable (sEVA)
75.34
IndependentVariable
p-value:
Constant
0.000
IndependentVariable (sEVA)
0.000
L-
126
TABLE 5.3 (continued)
HYPOTHESIS (1)
UNIVARIATE REGRESSION RESULTS
Panel B
[sMVA,,
Model:
80
=, +AsNOPAT,,
Statistic
Number of Observations
9473
Dependent Variable
sMVA
Independent Variable
sNOPAT
R-Squared
0.3748
Coefficients:
Constant
2.297306
Std. error
0.4917629
95% C.I.
1.33333/3.261281
Independent Variable (sNOPAT)
9.986957
Std. error
0.1320177
95% C.I.
9.72817/10.24574
t-statistics:
Constant
4.67
Independent Variable (sNOPAT)
75.65
p-value:
Constant
0.000
Independent Variable (sNOPAT)
0.000
127
TABLE 5.4
HYPOTHESIS (2)
MULTIVARIATE REGRESSION RESULTS
Panel A
Model In MVAj, =, 80 +Aln(EVA,, ) +,82 ln(TSR,,) +, 83In(Tobin's Q,,) +
e,,
Statistic
Number of Observations
2606
DependentVariable
1nMVA
IndependentVariable
InEVA, InTSR,InTobin'sQ
R-Squared
0.3028
Coefficients:
Constant
2.945609
Std. error
0.1001646
95% C. I.
2.749169/3.142049
Independent Variable (InEVA)
0.241497
Std. error
0.143445
95% C. I.
0.2129177/0.2691817
Independent Variable (InTSR)
0.0762908
Std. error
0.0105902
95% C. I.
0.0555216/0.09706
0.2897801
Independent Variable (InTobin'sQ)
Std. error
0.0177318
95% C. I.
0.255005/0.3245551
t-statistics:
Constant
29.41
Independent Variable (InEVA)
16.80
Independent Variable (InTSR)
7.20
Independent Variable (InTobin'sQ)
16.34
p-value:
Constant
0.000
Independent Variable (InEVA)
0.000
Independent Variable (InTSR)
0.000
I
independent Variable (InTobin'sQ)
128
TABLE 5.4 (continued)
HYPOTHESIS (2)
MULTIVARIATE
REGRESSION RESULTS
Panel B
COLLINEARITY DIAGNOSTICS
VIF
1.24
1.06
1.28
Variable
InEVA
InTSR
InTobin'sQ
Mean VIF:
Condition Number:
Tolerance
0.8034
0.9392
0.7841
1.19
9.1878
129
R-Squared
0.1966
0.0608
0.2159
TABLE 5.5
FIXED vs. RANDOM EFFECTS
(HAUSMAN TEST)
Al
Model:
Fixed
MVAj, =, 80 +A(In
(Equafinn 9
EVA,, ) +, 02 (In TSR,,) +, 83 (In Tobin's
Effects:
Statistic
Number of Observations
2606
DependentVariable
1nMVA
IndependentVariable
InEVA, InTSR, InTobin'sQ
R-Squared
0.3028
Coefficients:
Constant
2.945609
Std. error
0.1001646
95% C.I.
2.749169/3.142049
IndependentVariable (InEVA)
0.241497
Std. error
0.143445
95% C.I.
0.2129177/0.2691817
0.0762908
IndependentVariable (InTSR)
Std. error
0.0105902
95% C.I.
0.0555216/0.09706
0.2897801
IndependentVariable (InTobin'sQ)
Std. error
0.0177318
95% C.I.
0.255005/0.3245551
t-statistics:
Constant
29.41
IndependentVariable (InEVA)
16.80
IndependentVariable (InTSR)
7.20
IndependentVariable (InTobin'sQ)
16.34
p-value:
Constant
0.000
IndependentVariable (InEVA)
0.000
IndependentVariable (InTSR)
0.000
IndependentVariable (InTobin'sQ)
0.000
130
+ e,
TABLE 5.5 (continued)
Random
Effects:
Statistic
Number of Observations
2606
DependentVariable
InMVA
IndependentVariable
InEVA, InTSR,InTobin'sQ
R-Squared
0.5401
Coefficients:
Constant
3.165228
Std. error
0.084107
95% C.I.
3.000381/3.330075
IndependentVariable (InEVA)
0.2760608
Std. error
0.0131028
95% C.I.
0.2503798/0.3017417
IndependentVariable (InTSR)
0.0767928
Std. error
0.0103314
95% C.I.
0.0565435/0.097042
0.3218157
IndependentVariable (InTobin'sQ)
Std. error
0.0136327
95% C.I.
0.2950961/0.3485352
z-statistics:
Constant
37.63
IndependentVariable (InEVA)
21.07
IndependentVariable (InTSR)
7.43
IndependentVariable (InTobin'sQ)
23.61
p-value:
Constant
0.000
IndependentVariable (InEVA)
0.000
IndependentVariable (InTSR)
0.000
IndependentVariable (InTobin'sQ)
0.000
131
TABLE 5.5 (continued)
Coefficients:
(b)
insEVA
lnTSR
lnsTobin'sQ
.
.
.
eqFIX
2410497
0762908
2897801
(B)
(b-B)
Difference
.
.
.
2760608
0767928
0350111
-.
000502
-.
3218157
-. 0320356
b consistentunder Ho and Ha
B inconsistentunder Ha, efficient under Ho
Test: Ho: difference in coefficients not systematic
(3)
chi2
Prob>chi2
sqrt(diag(V_b-V_B))
(b-B)'[(V b-V B)^(-I)](b-B)
57.04
0.0000
132
S. E.
003838
.
.
.
0023268
0113387
STATISTICAL
TABLE 5.6
RESULTS OF STEP ONE OF HYPOTHESIS (2) TESTING
Panel A
I
Model:
In MVA,, = ao + a, In EVA,
Statistic
Number of Observations
4383
DependentVariable
lnMVA
IndependentVariable
InEVA
R-Squared
0.3912
Coefficients:
Constant
1.410927
Std. error
0.0413741
95% C.I.
1.329807/1.492046
IndependentVariable (InEVA)
0.332561
Std. error
0.0117604
95% C.I.
0.3095033/0.3556188
t-statistics:
Constant
34.10
Independent Variable (InEVA)
28.28
p-value:
Constant
0.000
Independent Variable (InEVA)
0.000
133
STATISTICAL
TABLE 5.6 (continued)
RESULTS OF STEP ONE OF HYPOTHESIS (2) TESTING
Panel B
Modell
In MVA,, ---,:
flo +Aln Tobin's Q,,
Statistic
Number of Observations
6715
Dependent Variable
lnMVA
Independent Variable
InTobin's Q
R-Squared
0.3480
Coefficients:
Constant
2.835
Std. error
0.0753512
95% C.I.
2.687584/2.983016
Independent Variable (InTobin'Q)
0.4931501
Std. error
0.0124448
95% C.I.
0.4687538/0.5175465
t-statistics:
Constant
37.63
Independent Variable (InTobin'sQ)
39.63
p-value:
Constant
0.000
Independent Variable (InTobin'sQ)
0.000
134
STATISTICAL
TABLE 5.6 (continued)
RESULTS OF STEP ONE OF HYPOTHESIS (2) TESTING
Panel C
In MVA,, yo + y, In TSR,,+ VII
Model:
Statistic
Number of Observations
4966
DependentVariable
lnMVA
IndependentVariable
InTSR
R-Squared
0.0570
Coefficients:
Constant
0.1249479
Std. error
0.0193188
95% C.I.
0.0870726/0.1628232
IndependentVariable (InTSR)
0.1202252
Std. error
0.0114126
95% C.I.
0.0978502
t-statistics:
Constant
6.47
Independent Variable (InTSR)
10.53
p-value:
Constant
0.000
Independent Variable (InTSR)
0.000
135
TABLE 5.7
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (2) TESTING
Panel A
I
#2
In
Model MVA,, =, go +Aln(EVA,, ) + ln(TSR,,)
Statistic
Number of Observations
2877
DependentVariable
1nMVA
IndependentVariable
InEVA, InTSR
R-Squared
0.4211
Coefficients:
Constant
1.528633
Std. error
0.0503877
95% C.I.
1.42982/1.627445
IndependentVariable (InEVA)
0.3165868
Std. error
0.0141168
95% C.I.
0.288903/0.3442705
0.0899577
IndependentVariable (InTSR)
Std. error
0.0106514
95% C.I.
0.0690698/0.1108457
t-statistics:
Constant
30.34
Independent Variable (InEVA)
22.43
IndependentVariable (InTSR)
8.45
p-value:
Constant
0.000
Independent Variable (InEVA)
0.000
Independent Variable (InTSR)
0.000
136
STATISTICAL
TABLE 5.7 (continued)
RESULTS OF STEP TWO OF HYPOTHESIS (2) TESTING
Panel B
Model In MVA,, =, 80 +Aln(EVA,, ) +, 82 In(Tobin's Q,,) + e,,
Statistic
Number of Observations
3648
Dependent Variable
lnMVA
Independent Variable
InEVA, InTobin'sQ
R-Squared
0.5293
Coefficients:
2.909641
Constant
Std. error
0.0836618
95% C.I.
2.7456/3.073683
0.2405591
Independent Variable (InEVA)
Std. error
0.0124102
95% C.I.
0.2162255/0.2648927
Independent Variable (InTobin'sQ)
0.3223923
Std. error
0.0124102
95% C.I.
0.2162255/0.2648927
t-statistics:
Constant
34.78
Independent Variable (InEVA)
19.38
Independent Variable (InTobin'sQ)
20.85
p-value:
Constant
0.000
Independent Variable (InEVA)
0.000
Independent Variable (InTobin'sQ)
0.000
137
STATISTICAL
TABLE 5.7 (continued)
RESULTS OF STEP TWO OF HYPOTHESIS (2) TESTING
Panel C
Model: In MVA,, =, 80 + InA(Tobin's Q,,) +, 82 ln(TSRt) +
e,
Statistic
Number of Observations
4410
DependentVariable
1nMVA
IndependentVariable
InTobin'sQ, InTSR
R-Squared
0.3566
Coefficients:
Constant
2.835656
Std. error
0.0968174
95% C.I.
2.645834/3.025478
IndependentVariable (InTobn'sQ)
0.4528348
Std. error
0.0160809
95% C.I.
0.4213063/0.4843633
Independent Variable (InTSR)
0.0940835
Std. error
0.0110063
95% C.I.
0.0725042/0.1156627
t-statistics:
Constant
29.29
Independent Variable (InTobin'sQ)
28.16
Independent Variable (InTSR)
8.55
p-value:
Constant
0.000
IndependentVariable (InTobin'sQ)
0.000
Independent Variable (InTSR)
0.000
138
TABLE 5.8
HYPOTHESIS (2)
RELATIVE
AND INCREMENTAL
VALUE-RELEVANCE
TESTS
Panel A
Relative Value-Relevance Test
(individual)
EVA
Tobin's Q
TSR
--0 - - 39.12% >
34.80% > 5.70%
Panel B
Relative Value-Relevance Test
(pair-wise combinations)
EVA/Tobin's Q
R2
52.93%
>
EVA/TSR
42.11%
Tobin's Q /TSR
35.66%
>
Panel C
Incremental Value-Relevance Test
EVA/TSR
FF 36.41%
EVA/Tobin's
18.13%
>
139
TABLE 5.9
HYPOTHESIS (3)
MULTIVARIATE REGRESSION RESULTS
Panel A
In MVA,, =& +Aln(profitability spreadj +A In(total invested
copitalj
Model
+, 83 In(Lagged EVAJ
)+
85
In(Tobin's
+, 841n(TSR
Qj
it
+ e,,
.
Statistic
Number of Observations
1979
DependentVariable
1nMVA
IndependentVariable
InSPREAD,LnTIC, InLagEVA,
InTSR, InTobinsQ
R-Squared
0.4724
Coefficients:
Constant
3.491256
Std. error
0.1616931
95% C.I.
3.174074/3.808437
IndependentVariable (InSPREAD)
0.129359
Std. error
0.01586
95% C.I.
0.0982846/0.1605073
0.3064579
IndependentVariable (InTIC)
Std. error
0.0482726
95% C.I.
0.2117649/0.4011508
0.04811
IndependentVariable (InLagEVA)
Std. error
0.0178984
95% C.I.
0.0130001/0.08322
0.0841718
IndependentVariable (InTSR)
Std. error
0.0121273
95% C.I.
0.0603826/0.107961
140
IndependentVariable (Tobin'sQ)
0.2506594
Std. error
0.0251512
95% C.I.
0.2013222/0.2999966
t-statistic
Constant
21.59
IndependentVariable (InSPREAD)
8.16
IndependentVariable (InTIC)
6.35
IndependentVariable (InLagEVA)
2.69
IndependentVariable (InTSR)
6.94
IndependentVariable (InTobin'sQ)
9.97
p-value:
Constant
0.000
IndependentVariable (InSPREAD)
0.000
IndependentVariable (InTIC)
0.000
IndependentVariable (InLagEVA)
0.007
IndependentVariable (InTSR)
0.000
IndependentVariable (InTobin'sQ)
0.000
141
TABLE 5.9 (continued)
HYPOTHESIS (3)
MULTIVARIATE
REGRESSION RESULTS
Panel B
Collinearity Diagnostics
Variable
(InSPREAD)
VIF
3.75
Tolerance
0.2666
R-Squared
0.7334
(InTIC)
1.13
0.8867
0.1133
(InLagEVA)
1.63
0.6134-
0.3866
(InTSR)
1.07
0.9380
0.0620
(InTobin'sQ)
2.94
0.3406
0.6594
MeanVIF:
ConditionNumber:
2.10
25.3668
142
TABLE 5.10
FIXED vs. RANDOM EFFECTS (Equation 5.13):
Hausman Test
In MVAj, =, 80 +Aln(profitability
spread,, ) +A In(total invested capital,, )
Model:
+A In(Lagged EVA,, ) +, 84 ln(TSR,, ) + 8, In(Tobin's Qj + e,,
Fixed-Effects:
Statistic
Number of Observations
1979
DependentVariable
lnMVA
IndependentVariable
InSPREAD,LnTIC, InLagEVA,
InTSR, InTobinsQ
R-Squared
0.4724
Coefficients:
3.491256
Constant
Std. error
0.1616931
95% C.I.
3.174074/3.808437
IndependentVariable (InSPREAD)
0.129359
Std. error
0.01586
95% C.I.
0.0982846/0.1605073
0.3064579
IndependentVariable (InTIC)
Std. error
0.0482726
95% C.I.
0.2117649/0.4011508
0.04811
IndependentVariable (InLagEVA)
Std. error
0.0178984
95% C.I.
0.0130001/0.08322
0.0841718
IndependentVariable (InTSR)
Std. error
0.0121273
95% C.I.
0.0603826/0.107961
143
IndependentVariable (Tobin'sQ)
0.2506594
Std. error
0.0251512
95% C.I.
0.2013222/0.2999966
t-statistic
Constant
21.59
IndependentVariable (InSPREAD)
8.16
IndependentVariable (InTIC)
6.35
IndependentVariable (InLagEVA)
2.69
IndependentVariable (InTSR)
6.94
IndependentVariable (InTobin'sQ)
9.97
p-value:
Constant
0.000
IndependentVariable (InSPREAD)
0.000
IndependentVariable (InTIC)
0.000
IndependentVariable (InLagEVA)
0.007
IndependentVariable (InTSR)
0.000
IndependentVariable (InTobin'sQ)
0.000
TABLE 5.10 (continued)
144
Rai
irl
loom
PA.
]MIUCts'.
Statistic
Number of Observations
1979
DependentVariable
lnMVA
IndependentVariable
InSPREAD,LnTIC, InLagEVA,
InTSR, InTobinsQ
R-Squared
0.4951
Coefficients:
Constant
3.639706
Std. error
0.1314526
95% C.I.
3.382063/3.897348
IndependentVariable (InSPREAD)
0.1187431
Std. error
0.0147294
95% C.I.
0.089874/0.1476122
IndependentVariable (InTIC)
0.307166
Std. error
0.0472233
95% C.I.
0.2146101/0.3997219
IndependentVariable (InLagEVA)
0.1137458
Std. error
0.0164276
95% C.I.
0.0815484/0.1459432
0.0839836
IndependentVariable (InTSR)
Std. error
0.0118733
95% C.I.
0.0607124/0.1072548
0.2802379
IndependentVariable (Tobin'sQ)
Std. error
0.0201392
95% C.I.
0.2407659/3.897348
z-statistic
27.69
Constant
145
IndependentVariable (InSPREAD)
8.06
IndependentVariable (InTIC)
6.50
IndependentVariable (InLagEVA)
6.92
IndependentVariable (InTSR)
7.07
IndependentVariable (InTobin'sQ)
13.92
p-value:
Constant
0.000
IndependentVariable (InSPREAD)
0.000
IndependentVariable (InTIC)
0.000
IndependentVariable (InLagEVA)
0.000
IndependentVariable (InTSR)
0.000
IndependentVariable (InTobin'sQ)
0.000
146
TABLE 5.10 (continued)
Coefficlen
s
(B)
(b)
eqFIX
1293959
lnSPREAD
.
lnlagEVA
lnTSR
04811
.
0841718
.
.
(b-B)
Difference
0106529
.
1187431
1137458
.
0839836
.
0656358
-.
0001882
.
b consistentunder Ho and Ha
Ho
Ha,
inconsistent
under
B
efficient
under
Test: Ho: difference in coefficients not systematic
(b-B)'[(V b-V B)/'(-I)I(b-B)
178.86
0.0000
Prob>chi2 =
(5)
chi2
147
b-V B))
sqrt(diag(V
S. E.
0058808
.
0107
0071054
.
002469
.
50663
TABLE5.11
STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING
Panel A
I
Model In MVA,, = ao + a, In profitability spread,,+
e,,
Statistic
Number of Observations
4431
DependentVariable
lnMVA
IndependentVariable
InSPREAD
R-Squared
0.3103
Coefficients:
Constant
2.867663
Std. error
0.0905222
95% C.I.
2.690183/3.045142
IndependentVariable (InSPREAD)
0.239306
Std. error
0.0082856
95% C.I.
0.2230611/0.2555509
t-statistics:
Constant
31.68
IndependentVariable (InSPREAD)
28.88
p-value:
Constant
0.000
IndependentVariable (InSPREAD)
0.000
148
TABLE 5.11 (continued)
STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING
Panel B
I
Model In MVA,, =, 8,, +Aln
total invested capital,, + e,,
Statistic
Number of Observations
8432
DependentVariable
1nMVA
IndependentVariable
InTIC
R-Squared
0.1409
Coefficients:
Constant
-0.3355091
0.011583
Std. error
95% C.I.
-0.3582152/-0.3128031
1.042992
IndependentVariable (InTIC)
Std. error
0.0331628
95% C.I.
0.9779834/1.108
t-statistics:
Constant
-28.97
31.45
IndependentVariable (InTIC)
p-value:
Constant
0.000
IndependentVariable (InTIC)
0.000
149
TABLE 5.11 (continued)
STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING
Panel C
l
Model: In MVA,,
yo + y, In Lagged EVA,,
Statistic
Number of Observations
3970
DependentVariable
1nMVA
IndependentVariable
InLagEVA
R-Squared
0.3020
Coefficients:
Constant
0.7036367
Std. error
0.0487725
95% C.I.
0.6080079/0.7992655
IndependentVariable (InLagEVA)
0.1427
Std. error
0.013955
95% C.I.
0.1153382/0.1700617
t-statistics:
Constant
14.43
IndependentVariable (InLagEVA)
10.23
p-value:
Constant
0.000
IndependentVariable (InLagEVA)
0.000
150
TABLE 5.11 (continued)
STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING
Panel D
ýnMVA,
-I=
Model:
9,
In
TSR,
+
o5o
Statistic
Number of Observations
4966
DependentVariable
1nMVA
IndependentVariable
InTSR
R-Squared
0.0570
Coefficients:
Constant
0.1249479
Std. error
0.0193188
95% C.I.
0.0870726/0.1628232
IndependentVariable (InTSR)
0.1202252
Std. error
0.0114126
95% C.I.
0.0978502/0.1426001
t-statistics:
Constant
6.47
IndependentVariable (InTSR)
10.53
p-value:
Constant
0.000
IndependentVariable (InTSR)
0.000
151
TABLE 5.11 (continued)
STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING
Panel E
l
Model: In MVA,,
=
/Tl
/To+
In Tobin's Q,,
Statistic
Number of Observations
6715
DependentVariable
lnMVA
IndependentVariable
InTobin'sQ
R-Squared
0.3480
Coefficients:
Constant
2.8353
Std. error
0.0753512
95% C.I.
2.687584/2.983016
IndependentVariable (InTobin'sQ)
0.4931501
Std. error
0.0124448
95% C.I.
0.4687538/0.5175465
t-statistics:
Constant
37.63
IndependentVariable (InTobin'sQ)
39.63
p-value:
Constant
0.000
IndependentVariable (InTobin'sQ)
0.000
152
TABLE 5.12
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel A
80
In
AfVAj,
+Aln(profitability
Model
=,
spreadj +A In(Tobin's Q,,) + e,,
Statistic
Number of Observations
3686
DependentVariable
1nMVA
IndependentVariable
InSPREAD,InTobin'sQ
R-Squared
0.4311
Coefficients:
Constant
3.41377
Std. error
0.1026209
95% C.I.
3.212555/3.614984
IndependentVariable (InSPREAD)
0.1477277
Std. error
0.0105464
95% C.I.
0.1270488/0.1684066
IndependentVariable (InTobin'sQ)
0.2639882
Std. error
0.0175321
95% C.I.
0.2296119/0.2983644
t-statistics:
Constant
33.27
independentVariable (InSPREAD)
14.01
IndependentVariable (InTobin'sQ)
15.06
p-value:
Constant
0.000
IndependentVariable (InSPREAD)
0.000
IndependentVariable (InTobin'sQ)
0.000
153
TABLE 5.12 (continued)
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel B
Model In MVA,, = 80 +, 8, ln(profitability spread,,) +A ln(TSR,, + e,
Statistic
Number of Observations
2902
DependentVariable
1nMVA
IndependentVariable
InSPREAD, InTSR
R-Squared
0.3794
Coefficients:
2.959312
Constant
Std. error
0.114416
95% C.I.
2.734938/3.183686
IndependentVariable (InSPREAD)
0.2284903
Std. error
0.010361
95% C.I.
0.208168/0.2488127
0.0918727
IndependentVariable (InTSR)
Std. error
0.0106942
95% C.I.
0.0709009
t-statistics:
Constant
25.86
IndependentVariable (InSPREAD)
22.05
IndependentVariable (InTSR)
8.59
p-value:
Constant
0.000
IndependentVariable (InSPREAD)
0.000
IndependentVariable (InTSR)
0.000
154
TABLE 5.12 (continued)
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel C
lInMVAi,
Model
6,,
8,
In(profitability
+,
=,
spread,,)+ 821n(TIC,,)+e,,
Statistic
Number of Observations
4429
DependentVariable
lnMVA
IndependentVariable
InSPREAD,InTIC
R-Squared
0.4029
Coefficients:
Constant
2.399658
Std. error
0.0925747
95% C.I.
2.218154/2.581162
IndependentVariable (InSPREAD)
0.2058962
Std. error
0.0082986
95% C.I.
0.1896257/0.2221667
0.5441606
IndependentVariable (InTIC)
Std. error
0.0345928
95% C.I.
0.4763372/0.6119839
t-statistics:
Constant
25.92
IndependentVariable (InSPREAD)
24.81
IndependentVariable (InTIC)
15.73
p-value:
Constant
0.000
IndependentVariable (InSPREAD)
0.000
independent Variable (InTIC)
0.000
155
STATISTICAL
TABLE 5.12 (continued)
RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel D
IIn WA,,
80
8,
In(profitability
Model
+,
=
spreadj +A In(Lagged E VAlt)+e,
Statistic
Number of Observations
3261
DependentVariable
1nMVA
IndependentVariable
InSPREAD,InLagEVA
R-Squared
0.4030
Coefficients:
Constant
3.249292
Std. error
0.1111003
95% C.I.
3.031438/3.467147
IndependentVariable (InSPREAD)
0.2548422
Std. error
0.0103714
95% C.I.
0.2345052/0.2751793
IndependentVariable (InLagEVA)
0.0448538
Std. error
0.0140203
95% C.I.
0.0173616/0.0723459
t-statistics:
Constant
29.25
IndependentVariable (InSPREAD)
24.57
IndependentVariable (InLagEVA)
3.20
p-value:
Constant
0.000
IndependentVariable (InSPREAD)
0.000
independentVariable (InLagEVA)
I 0.000
156
I
TABLE 5.12(continued)
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel E
[In
Model MYA,,
80
8,
In(total
investedcapitalj +)62In(Tobin's Q,,
+,
=
+ e,,
Statistic
Number of Observations
6712
DependentVariable
1nMVA
IndependentVariable
InTIC, InTobin'sQ
R-Squared
0.3784
Coefficients:
Constant
2.246136
Std. error
0.081698
95% C.I.
2.085977/2.406294
IndependentVariable (InTIC)
0.6485643
Std. error
0.0389131
95% C.I.
0.5722803/0.7248484
IndependentVariable (InTobin'sQ)
0.4136267
Std. error
0.013066
95% C.I.
0.3880125/0.439241
t-statistics:
Constant
27.49
IndependentVariable (InTIC)
16.67
IndependentVariable (InTobin'sQ)
31.66
p-value:
Constant
0.000
IndependentVariable (InTIC)
0.000
IndependentVariable (InTobin'sQ)
0.000
157
STATISTICAL
TABLE 5.12 (continued)
RESULTS OF STEP TWO OF HYPOTHESIS (3)
TESTING
Panel F
Model In MVA,, = 80 + P, In(total investedcapital, +A ln(TSR,,
+ e,,
Statistic
Number of Observations
4964
DependentVariable
lnMVA
IndependentVariable
InTIC, InTSR
R-Squared
0.1595
Coefficients:
Constant
-0.0371087
0.020153
Std. error
95% C.I.
-0.0766195/0.0024021
0.8733576
IndependentVariable (InTIC)
Std. error
0.0437758
95% C.I.
0.7875333
IndependentVariable (InTSR)
0.1153032
Std. error
0.0109023
95% C.I.
0.0939288/0.1366775
t-statistics:
Constant
IndependentVariable (InTIC)
-1.84
19.95
IndependentVariable (InTSR)
-1.84
p-value:
Constant
0.000
independent Variable (InTIC)
0.000
IndependentVariable (InTSR)
0.066
158
TABLE 5.12 (continued)
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel G
I
Model In MVAj, =, 60 +, 61In(Lagged EVA,,)+ A In(Tobin's Q,,) + e,,
Number of Observations
3313
DependentVariable
lnMVA
IndependentVariable
InLagEVA, InTobin'sQ
R-Squared
0.4277
Coefficients:
Constant
3.369323
Std. error
0.0981309
95% C.I.
3.176901/3.561745
IndependentVariable (InLagEVA)
0.06623305
Std. error
0.0131242
95% C.I.
0.040957/0.0919653
IndependentVariable (InTobin'sQ)
0.4924473
Std. error
0.0161722
95% C.I.
0.4607358/0.5241589
t-statistics:
Constant
34.33
IndependentVariable (InLagEVA)
5.05
IndependentVariable (InTobin'sQ)
30.45
p-value:
Constant
0.000
IndependentVariable (InLagEVA)
0.000
IndependentVariable (InTobin'sQ)
0.000
159
TABLE 5.12 (continued)
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel H
I
Model In WA,, = 80 +,Bl In(Lagged EVAJ +A ln(TSR,,) + e,,
Number of Observations
2576
DependentVariable
1nMVA
IndependentVariable
InLagEVA, InTSR
R-Squared.
0.3156
Coefficients:
Constant
0.9106314
Std. error
0.0624719
95% C.I.
0.7881103/1.033152
IndependentVariable (InLagEVA)
0.1326416
Std. error
0.0173883
95% C.I.
0.0985394/0.1667438
IndependentVariable (InTSR)
0.1196001
Std. error
0.0128377
95% C.I.
0.0944226/0.1447776
t-statistics:
Constant
14.58
IndependentVariable (InLagEVA)
7.63
IndependentVariable (InTSR)
9.32
p-value:
Constant
0.000
IndependentVariable (InLagEVA)
0.000
100
IndependentVariable (InTSR)
160
TABLE 5.12 (continued)
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel I
Model In MVAj, =, 80 +Aln(total
investedcapital,,)
+ 82
.
In(Lagged EVAJ + e,,
Number of Observations
3966
DependentVariable
lnMVA
IndependentVariable
InTIC, InLagEVA
R-Squared
0.2844
Coefficients:
Constant
0.4753706
Std. error
0.0488642
95% C.I.
0.379562/0.5711792
IndependentVariable (InTIC)
0.6940391
Std. error
0.0385467
95% C.I.
0.6184601/0.769618
IndependentVariable (InLagEVA)
0.1156793
Std. error
0.0135523
95% C.I.
0.0891071/0.1422515
t-statistics:
Constant
9.73
IndependentVariable (InTIC)
18.01
IndependentVariable (InLagEVA)
8.54
p-value:
Constant
0.000
IndependentVariable (InTIC)
0.000
IndependentVariable (InLagEVA)
0.000
161
TABLE 5.12(continued)
STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING
Panel J
I
Model In MVA,, =, 8, +Aln(TSR,, ) +P2 In(Tobin's Qi,) + e,
Number of Observations
4410
DependentVariable
1nMVA
IndependentVariable
InTSR, InTobin'sQ
R-Squared
0.3566
Coefficients:
Constant
2.835656
Std. error
0.0968174
95% C.I.
2.645834/3.025478
IndependentVariable (InTSR)
0.0940835
Std. error
0.0110063
95% C.I.
0.0725042/0.1156627
IndependentVariable (InTobin'sQ)
0.4528348
Std. error
0.0160809
95% C.I.
0.4213063/0.4843633
t-statistics:
Constant
29.29
IndependentVariable (InTSR)
8.55
IndependentVariable (InTobin'sQ)
28.16
p-value:
Constant
0.000
IndependentVariable (InTSR)
0.000
IndependentVariable (InTobin'sQ)
0.000
162
TABLE 5.13
HYPOTHESIS (3)
RELATIVE VALUE-RELEVANCE
TEST
Panel A
Relative Value-RelevanceTest
(individual)
Profitability
Spread
IF -
38.65%
Tobin's
Q
>
Lagged
EVA
34.80% > 30.20% >
Total
Total
Invested
Shareholder
Capital
Return
,
14.09% >
5.70%
Panel B
RELATIVE VALUE-RFLEVANCE TEST
(pair-wise combinations in order of decreasingpower)
Pair-Wise Combination
R2
Profitability Spread/ Tobin's Q
43.11
Lagged EVA / Tobin's Q
42.77
Profitability Spread/ LaggedEVA
40.30
Profitability Spread/ Total InvestedCapital
40.29
Profitability Spread/ Total ShareholderReturn
37.94
Total InvestedCapital / Tobin's Q
37.84
Total ShareholderReturn/ Tobin's Q
35.66
Return
Shareholder
/
Total
EVA
Lagged
31.56
Total InvestedCapital / LaggedEVA
28.44
15.95
Return
Shareholder
/
Total Invested Capital Total
163
TABLE 5.14
HYPOTHESIS 3
INCREMENTAL
VALUE-RELEVANCE TEST
Pair-Wise Combination
Incremental
Valuerelevance
Profitability Spread/ Tobin's Q
8.31
Lagged EVA / Tobin's Q
7.97
Profitability Spread/ LaggedEVA
10.10
Profitability Spread/ Total InvestedCapital
26.20
Profitability Spread/ Total ShareholderReturn
32.24
Total Invested Capital / Tobin's Q
3.04
Total ShareholderReturn/ Tobin's Q
0.86
Lagged EVA / Total ShareholderReturn
25.86
Total Invested Capital / LaggedEVA
Total Invested Capital / Total ShareholderReturn
-1.76
10.25
Tobin's Q/ Profitability Spread
4.46
Tobin's Q/ LaggedEVA
12.57
Lagged EVA / Profitability Spread
1.65
Total Invested Capital / Profitability Spread
1.64
Total ShareholderReturn / Profitability Spread
Tobin's Q/ Total InvestedCapital
-0.81
23.75
Tobin's Q/ Total ShareholderReturn
29.96
Total ShareholderReturn / LaggedEVA
1.36
Lagged EVA / Total InvestedCapital
14.35
Capital
Invested
/
Total
Return
Shareholder
Total
1.86
164
Appendix C:
The 2002 Stern Stewart Performance 1000
Top 1000Creatorsof Shareholderwealth amongU. s. Companies,1998-2002
Market value Added (MVA)
The2002Stern Stewart Performance 1000
Top 1000Creatorsof
ShareholderWealthAmongU.S.
Companies,1998-2002
MVA
Rank
2002
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
2001
2
3
1
5
12
10
11
14
8
9
6
20
4
21
24
25
19
23
18
16
17
15
13
29
7
30
22
71
27
36
39
1998 Ticker
1 MSFT
6 WIVIT
2 GE
16 JNJ
15 PFE
10 MIRK
20 PG
13 IBM
11 XOM
8 KO
3 INTC
18 DELL
C
5 CSCO
51 ORCL
58 AMGN
25 LLY
UPS
FNM
44 PEP
21 MO
30 ABT
23 HD
62 MMM
AIG
48 MDT
28 WYE
74 CMCSA
59 BUD
33 DD
75 PHA
Company name
Microsoft Corp
Wal-Mart Stores
General Electric Co
Johnson & Johnson
Pfizer Inc
Merck & Co
Procter & Gamble Co
Intl Business Machines Corp
Exxon Mobil Corp
Coca-Cola Co
Intel Corp
Dell Computer Corp
Citigroup Inc
Cisco Systems Inc
Oracle Corp
Amgen Inc
Lilly (Eli) & Co
United Parcel Service Inc
Fannie Mae
Pepsico Inc
Altria Group Inc
Abbott Laboratories
Home Depot Inc
3M Co
American International Group
Medtronic Inc
Wyeth
Comcast Corp
Anheuser-Busch Cos Inc
Du Pont (E 1)De Nemours
Pharmacia Corp
165
Industry
Code
4510
2550
2010
3520
3520
3520
3030
4520
1010
3020
4520
4520
4020
4520
4510
3520
3520
2030
4020
3020
3020
3520
2550
2010
4030
3510
3520
2540
3020
1510
3520
Industry
Name
Software & Services
Retailing
Capital Goods
Pharmaceuticals& Biotech
Pharmaceuticals& Biotech
Pharmaceuticals& Biotech
Household& Personal Prods
Technology Hardware& Equip
Energy
Food Beverage & Tobacco
Technology Hardware& Equip
Technology Hardware& Equip
Diversified Financials
Technology Hardware& Equip
Software & Services
Pharmaceuticals& Biotech
Pharmaceuticals& Biotech
Transportation
Diversified Financials
Food Beverage & Tobacco
Food Beverage & Tobacco
Pharmaceuticals& Biotech
Retailing
Capital Goods
Insurance
Health Care Equipment& Svcs
Pharmaceuticals& Biotech
Media
Food Beverage & Tobacco
Materials
Pharmaceuticals& Biotech
32
33
34
35
36
37
38
39
28
35
92
34
49
46
48
33
17 BMY
FIRE
63 EBAY
AXP
67 CL
98 LOW
198 UNH
73 WAG
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
47
26
37
63
40
59
68
96
53
67
42
54
60
41
55
102
73
85
32
56
31
80
82
45
180
124
38
64
99
97
166
103
128
341
270
51
81
118
111
WFC
KFT
BLS
BAC
TGT
FDC
QCOM
FRX
G
SYY
VZ
MIVIC
UTX
SGP
KSS
SLM
COX
DISH
MWD
FITB
TXN
GCI
EMIR
ADP
L
AFL
AMAT
LIVIT
SO
GIS
AMZN
AVP
SYK
NXTL
BSX
GS
HDI
DNA
WWY
32
69
156
90
344
46
167
27
68
31
140
84
227
52
91
77
72
54
87
148
163
131
53
117
224
127
110
170
173
153
Bristol Myers Squibb
Federal Home Loan Mortg Corp
eBay Inc
American Express
Colgate-PalmoliveCo
Lowes Cos
UnitedhealthGroup Inc
Walgreen Co
Wells Fargo & Co
Kraft Foods Inc
Bellsouth Corp
Bank Of America Corp
Target Corp
First Data Corp
Qualcomm Inc
Forest Laboratories
A
-CI
Gillette Co
Sysco Corp
Verizon Communications
Marsh & Mclennan Cos
United Technologies Corp
Schering-Plough
KohIs Corp
SLM Corp
Cox Communications -Cl A
Echostar Commun Corp -CIA
Morgan Stanley
Fifth Third Bancorp
Texas Instruments Inc
Gannett Co
Emerson Electric Co
Automatic Data Processing
Liberty Media Corp -Ser A
Aflac Inc
Applied Materials Inc
Lockheed Martin Corp
Southern Co
General Mills Inc
Amazon. Com Inc
Avon Products
Stryker Corp
Nextel Communications
Boston Scientific Corp
Goldman Sachs Group Inc
Harley-Davidson Inc
Genentech Inc
Wrigley (Wm) Jr Co
166
3520
4020
2550
4020
3030
2550
3510
3010
4010
3020
5010
4010
2550
2020
4520
3520
3030
3010
5010
4030
2010
3520
2550
4020
2540
2540
4020
4010
4520
2540
2010
2020
2540
4030
4520
2010
5510
3020
2550
3030
3510
5010
3510
4020
2510
3520
3020
Pharmaceuticals & Biotech
Diversified Financials
Retailing
Diversified Financials
Household & Personal Prods
Retailing
Health Care Equipment & Svcs
Food & Drug Retailing
Banks
Food Beverage & Tobacco
Telecommunication Services
Banks
Retailing
Commercial Svcs & Supplies
Technology Hardware & Equip
Pharmaceuticals & Biotech
Household & Personal Prods
Food & Drug Retailing
Telecommunication Services
Insurance
Capital Goods
Pharmaceuticals & Biotech
Retailing
Diversified Financials
Media
Media
Diversified Financials
Banks
Technology Hardware & Equip
Media
Capital Goods
Commercial Svcs & Supplies
Media
Insurance
Technology Hardware & Equip
Capital Goods
Utilities
Food Beverage & Tobacco
Retailing
Household & Personal Prods
Health Care Equipment & Svcs
Telecommunication Services
Health Care Equipment & Svcs
Diversified Financials
Automobiles & Components
Pharmaceuticals & Biotech
Food Beverage & Tobacco
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
ill
112
113
114
115
116
117
118
119
120
121
122
123
124
125
65
75
131
116
100
93
151
89
135
90
58
110
126
105
145
62
109
186
106
179
84
107
50
115
981
222
119
182
181
157
121
138
69
52
146
57
86
156
70
43
108
213
123
176
112
72
136
78
162
47
241
116
179
82
94
187
100
119
36
158
43
243
438
144
125
157
38
145
104
528
151
186
139
101
367
96
176
201
147
264
83
108
109
711
113
246
103
ill
.
VIA.B
MXIM
GPS
BBBY
K
PAYX
DOW
ITW
TRB
COST
KR13
FOX
EMC
LLTC
PGR
DIS
ADI
APOL
LUV
ZMH
OMC
CAT
MCD
TJX
CCU
GILD
MHP
LXK
FDX
CVC
D
GDT
GD
BK
SBUX
MER
BBY
EXC
KMB
BAX
SLE
STJ
GMH
AGN
Viacom Inc
B
-Cl
Maxim IntegratedProducts
Gap Inc
Bed Bath & Beyond Inc
Kellogg Co
PaychexInc
Dow Chemical
Illinois Tool Works
Tribune Co
Costco Wholesale Corp
Mbna Corp
Fox EntertainmentGroup Inc
EMC Corp/Ma
Linear TechnologyCorp
ProgressiveCorp-Ohio
Disney (Walt) Co
Analog Devices
Apollo Group Inc -CIA
SouthwestAirlines
Zimmer HIdgs Inc
Omnicom Group
Caterpillar Inc
McDonaldsCorp
Tjx CompaniesInc
Clear Channel Communications
Gilead Sciences Inc
McGraw-HillCompanies
Lexmark Intl Inc -CIA
Fedex Corp
CablevisionSys Corp -Cl A
Dominion ResourcesInc
Guidant Corp
General DynamicsCorp
Bank Of New York Co Inc
Starbucks Corp
Merrill Lynch & Co
Best Buy Co Inc
Exelon Corp
Kimberly-ClarkCorp
Baxter InternationalInc
Sara Lee Corp
St Jude Medical Inc
General Motors Cl H
Allergan Inc
HNZ
CAH
ALL
Heinz (H J) Co
Cardinal Health Inc
Allstate Corp
167
2540
4520
2550
2550
3020
2020
1510
2010
2540
2550
4020
2540
4520
4520
4030
2540
4520
2020
2030
3510
2540
2010
2530
2550
2540
3520
2540
4520
2030
2540
5510
3510
2010
4010
2530
4020
2550
5510
3030
3510
3020
3510
2540
3520
3020
3510
4030
Media
Technology Hardware & Equip
Retailing
Retailing
Food Beverage & Tobacco
Commercial Svcs & Supplies
Materials
Capital Goods
Media
Retailing
Diversified Financials
Media
Technology Hardware & Equip
Technology Hardware & Equip
Insurance
Media
Technology Hardware & Equip
Commercial Svcs & Supplies
Transportation
Health Care Equipment & Svcs
Media
Capital Goods
Hotels Restaurants & Leisure
Retailing
Media
Pharmaceuticals & Biotech
Media
Technology Hardware & Equip
Transportation
Media
Utilities
Health Care Equipment & Svcs
Capital Goods
Banks
Hotels Restaurants & Leisure
Diversified Financials
Retailing
Utilities
Household & Personal Prods
Health Care Equipment & Svcs
Food Beverage & Tobacco
Health Care Equipment & Svcs
Media
Pharmaceuticals & Biotech
Food Beverage & Tobacco
Health Care Equipment & Svcs
Insurance
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
130
122
152
129
104
209
148
173
147
127
114
153
139
155
259
77
185
169
165
178
189
211
174
91
201
78
133
237
191
200
95
192
243
245
140
143
214
184
187
261
216
221
226
132
74
287
175
311
95
317
88
192
222
213
182
189
106
256
343
393
34
271
301
115
305
245
526
183
120
99
136
431
262
292
249
259
135
229
546
188
132
236
293
355
401
270
762
194
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CPB
AZO
PBI
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CAG
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STI
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ADBE
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BMET
MEDI
SPLS
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NYT
IGT
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INTU
MEL
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FPL
FDO
SSP
KLAC
HCA
SYMC
ALTR
Wellpoint Hlth Netwrk
-CIA
Campbell Soup Co
Autozone Inc
Pitney Bowes Inc
Xilinx Inc
Praxair Inc
Hershey Foods Corp
Conagra Foods Inc
Danaher Corp
Nike Inc -Cl B
Suntrust Banks Inc
ITT IndustriesInc
Adobe Systems Inc.
ElectronicArts Inc
Expedia Inc
Hewlett-PackardCo
Biomet Inc
MedimmuneInc
Staples Inc
UnitedglobalcornInc -Cl A
New York Times Co -Cl A
Intl Game Technology
Becton Dickinson& Co
State Street Corp
Clorox Co/De
Alcoa Inc
Yum Brands Inc
Golden West FinancialCorp
GenzymeCorp
Intuit Inc
Mellon FinancialCorp
Block H&R Inc
Ecolab Inc
WashingtonPost -Cl B
Limited Brands Inc
UnivisionCommunicationsInc
Chiron Corp
Air Products& ChemicalsInc
Lauder Estee Cos Inc -Cl A
Weight Watchers Intl Inc
FPL Group Inc
Family Dollar Stores
EW Scripps -CIA
Kla-TencorCorp
HCA Inc
SymantecCorp
Altera Corp
168
3510
3020
2550
2020
4520
1510
3020
3020
2010
2520
4010
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4510
4510
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2530
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Software& Services
TechnologyHardware& Equip
HealthCare Equipment& Svcs
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Retailing
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Hotels Restaurants& Leisure
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DiversifiedFinancials
Household& PersonalProds
Materials
HotelsRestaurants& Leisure
Banks
Pharmaceuticals& Biotech
Software& Services
Banks
CommercialSvcs & Supplies
Materials
Media
Retailing
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Pharmaceuticals& Biotech
Materials
Household& PersonalProds
Retailing
Utilities
Retailing
Media
TechnologyHardware& Equip
HealthCare Equipment& Svcs
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TechnologyHardware& Equip
173
174
175
176
177
178
179
177
188
266
158
203
247
250
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
171
134
168
149
162
960
227
232
256
284
142
263
280
241
172
240
225
161
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76
390
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258
113
450
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586
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477
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225
288
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212
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218
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Affiliated COMPSvcs
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UST Inc
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BJ Services Co
Lehman Brothers Holdings Inc
Newmont Mining Corp
Veritas Software Co
Baker-Hughes Inc
Anadarko Petroleum Corp
Yahoolnc
Franklin Resources Inc
Anthem Inc
Knight-Ridder Inc
Brown-Forman -Cl B
IDEC Pharmaceuticals Corp
Southtrust Corp
PPL Corp
Public Service Entrp
Cintas Corp
Deere & Co
Avery Dennison Corp
Quest Diagnostics Inc
Cigna Corp
Concord Efs Inc
CoachInc
Biogen Inc
Cincinnati Financial Corp
Express Scripts Inc
Northern Trust Corp
Mylan Laboratories
Countrywide Financial Corp
Masco Corp
Aramark Corp
Expeditors Intl Wash Inc
Dollar General Corp
Rohm & Haas Co
Dover Corp
Varian Medical Systems Inc
Network Appliance Inc
IMS Health Inc
American Standard COSInc
Progress Energy Inc
Chevrontexaco Corp
Barr Laboratories Inc
169
4510
3020
1010
2530
5010
1510
1010
4020
1510
4510
1010
1010
4510
4020
3510
2540
3020
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4010
5510
5510
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3510
3510
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2520
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4030
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4020
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2550
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3510
4520
3510
2010
5510
1010
3520
Software & Services
Food Beverage & Tobacco
Energy
Hotels Restaurants & Leisure
Telecommunication Services
Materials
Energy
Diversified Financials
Materials
Software & Services
Energy
Energy
Software & Services
Diversified Financials
Health Care Equipment & Svcs
Media
Food Beverage & Tobacco
Pharmaceuticals & Biotech
Banks
Utilities
Utilities
Commercial Svcs & Supplies
Capital Goods
Commercial Svcs & Supplies
Health Care Equipment & Svcs
Health Care Equipment & Svcs
Commercial Svcs & Supplies
Consumer Durables & Apparel
Pharmaceuticals & Biotech
Insurance
Health Care Equipment & Svcs
Banks
Pharmaceuticals & Biotech
Diversified Financials
Capital Goods
Commercial Svcs & Supplies
Transportation
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Materials
Capital Goods
Health Care Equipment & Svcs
Technology Hardware & Equip
Health Care Equipment & Svcs
Capital Goods
Utilities
Energy
Pharmaceuticals & Biotech
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
326
275
295
183
206
298
272
271
196
220
316
125
325
400
344
301
318
257
292
330
252
332
328
233
317
388
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198
120
194
260
361
190
279
304
202
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538
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269
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223
379
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299
447
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840
306
267
484
640
150
550
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425
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412
453
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AEP
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WIVI
SDS
SCH
HCBK
FCX
USAI
RSH
FE
ABC
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HET
CPS
XTO
First Tennessee Natl Corp
EOG Resources Inc
Genuine Parts Co
Fiserv Inc
Synovus Financial Cp
Kinder Morgan Inc
Total System ServicesInc
Johnson Controls Inc
BB&T Corp
Microchip TechnologyInc
Bea Systems Inc
Conocophillips
Paccar Inc
Whole Foods Market Inc
M&T Bank Corp
Occidental PetroleumCorp
McCormick & Co
Hilton Hotels Corp
North Fork Bancorporation
Sigma-Aldrich
Cdw ComputerCenters Inc
Eaton Corp
Union Pacific Corp
Tiffany & Co
Westwood One Inc
CH RobinsonWorldwideInc
Pixar
WeyerhaeuserCo
Sprint Pcs Group
Waste ManagementInc
Jefferson-PilotCorp
Ameren Corp
American Electric Power
Health ManagementAssoc
WashingtonMutual Inc
Sungard Data SystemsInc
Schwab (Charles)Corp
Hudson City Bancorp
Freeprt Mcmor Cop&GId -Cl B
USA Interactive
RadioshackCorp
FirstenergyCorp
AmerisourcebergenCorp
Abercrombie& Fitch -Cl A
Harrahs EntertainmentInc
ChoicepointInc
XTO Energy Inc
170
4010
1010
2550
2020
4010
5510
2020
2510
4010
4520
4510
1010
2510
3010
4010
1010
3020
2530
4010
1510
2550
2010
2030
2550
2540
2030
2540
1510
5010
2020
4030
5510
5510
3510
4010
4510
4020
4010
1510
2550
2550
5510
3510
2550
2530
2020
1010
Banks
Energy
Retailing
Commercial Svcs & Supplies
Banks
Utilities
Commercial Svcs & Supplies
Automobiles & Components
Banks
Technology Hardware & Equip
Software & Services
Energy
Automobiles & Components
Food & Drug Retailing
Banks
Energy
Food Beverage & Tobacco
Hotels Restaurants & Leisure
Banks
Materials
Retailing
Capital Goods
Transportation
Retailing
Media
Transportation
Media
Materials
Telecommunication Services
Commercial Svcs & Supplies
Insurance
Utilities
Utilities
Health Care Equipment & Svcs
Banks
Software & Services
Diversified Financials
Banks
Materials
Retailing
Retailing
Utilities
Health Care Equipment & Svcs
Retailing
Hotels Restaurants & Leisure
Commercial Svcs & Supplies
Energy
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
297
298
299
322
565
307
293
239
363
238
244
410
338
285
207
342
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335
541
288
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295 MOLX
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253 ED
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524 LNCR
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303 DJ
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280 JBL
456 CIN
540 QLGC
958 WFR
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564 LIZ
510 EAT
617 BLL
332 GWW
790 NVR
911 ETR
972 DF
300
301
302
303
304
305
306
307
308
309
310
311
312
313
340
417
315
423
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BCR
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NWAC
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Williams-SonomaInc
Dreyer's Grand Ice Cream Inc
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Sei InvestmentsCo
Dun & BradstreetCorp
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Hotels.Com
Mercury InteractiveCorp
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Ross Stores Inc
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Dow Jones & Co Inc
Iron Mountain Inc
Career EducationCorp
PNC FinancialSvcs Group Inc
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Price (T. Rowe) Group
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Coca-Cola Enterprises
Patterson Dental Co
Legg Masoninc
Northwest Airlines Corp
Dentsply Internatl Inc
Sherwin-Williams Co
L-3 Communications Hldgs Inc
Starwood Hotels&Resorts Wrld
171
2550
3020
2020
4020
4020
2020
4520
1010
4510
4510
5510
3020
3510
2010
2550
4510
2540
2020
2020
4010
4520
5510
4520
4520
4020
4520
2520
2530
1510
2010
2520
5510
3020
2010
4020
3510
5510
4520
3510
3020
3510
4020
2030
3510
2550
2010
2530
Retailing
Food Beverage & Tobacco
Commercial Svcs & Supplies
Diversified Financials
Diversified Financials
Commercial Svcs & Supplies
Technology Hardware & Equip
Energy
Software & Services
Software & Services
Utilities
Food Beverage & Tobacco
Health Care Equipment & Svcs
Capital Goods
Retailing
Software & Services
Media
Commercial Svcs & Supplies
Commercial Svcs & Supplies
Banks
Technology Hardware & Equip
Utilities
Technology Hardware & Equip
Technology Hardware & Equip
Diversified Financials
Technology Hardware & Equip
Consumer Durables & Apparel
Hotels Restaurants & Leisure
Materials
Capital Goods
Consumer Durables & Apparel
Utilities
Food Beverage & Tobacco
Capital Goods
Diversified Financials
Health Care Equipment & Svcs
Utilities
Technology Hardware & Equip
Health Care Equipment & Svcs
Food Beverage & Tobacco
Health Care Equipment & Svcs
Diversified Financials
Transportation
Health Care Equipment & Svcs
Retailing
Capital Goods
Hotels Restaurants & Leisure
314
315
316
317
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
342
343
344
345
346
347
348
349
350
351
352
353
354
355
356
357
358
359
360
212
372
381
554
345
154
402
432
413
267
334
393
306
350
442
365
235
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425
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506
303
532
314
436
376
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570
375
544
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563
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141
435
430
426
420
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623 ACV
448 DLX
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MET
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937 OEI
248 ABI
467 RHI
352 HB
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TCB
896 PTEN
718 ADVP
391 PSFT
CBSS
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974 3UALAQ
429 DTE
336 LEG
BPOP
509 ESV
867 CHS
312 PH
616 S11
NCF
421 DLTR
872 COCO
635 MUR
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290 VMC
338 RCNC
261 CTL
SPC
347 SEPR
122 DUK
178 CD
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UB
560 NDN
416 GNTX
447 OHP
DRL
917 AMLN
MI
Laboratory Cp Of Amer HIdgs
Alberto-Culver Co
B
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Deluxe Corp
Pactiv Corp
First Health Group Corp
Metlife Inc
Intl Flavors & Fragrances
Ocean Energy Inc
Applera Corp Applied Biosys
Robert Half Intl Inc
Hillenbrand Industries
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Outback SteakhouseInc
UnionbancalCorp
99 Cents Only Stores
Gentex Corp
Oxford Health Plans Inc
Doral Financial Corp
Amylin PharmaceuticalsInc
Marshall & Ilsley Corp
172
3510
3030
2020
1510
3510
4030
1510
1010
3510
2020
3510
3020
4030
4010
1010
3510
4510
4010
4010
2030
5510
2520
4010
1010
2550
2010
1010
4010
2550
2020
1010
4010
1510
5010
5010
4030
3520
5510
2020
2530
4010
2550
2510
3510
4020
3520
4010
Health Care Equipment & Svcs
Household & Personal Prods
Commercial Svcs & Supplies
Materials
Health Care Equipment & Svcs
Insurance
Materials
Energy
Health Care Equipment & Svcs
Commercial Svcs & Supplies
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Energy
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Pharmaceuticals & Biotech
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Hotels Restaurants & Leisure
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Health Care Equipment & Svcs
Diversified Financials
Pharmaceuticals & Biotech
Banks
361
362
363
364
365
366
367
368
369
370
371
372
373
374
375
376
377
378
379
489
483
385
837
477
503
159
360
472
286
445
229
704
431
452
382
832
611
579
380
381
382
383
384
385
386
387
388
389
390
391
392
393
394
395
396
397
398
399
400
401
402
403
404
405
406
407
457
480
766
268
646
429
453
484
491
323
349
518
661
399
631
556
501
416
508
310
583
369
374
555
163
586
428
624
254
57
608
854
678
432
298
521
798
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507
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929
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655
486
961
424
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422
650
652
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395
728
559
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499
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866
538
815
BRO
ASO
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LVLT
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Certegy Inc
Intl Speedway Corp -CIA
US Bancorp
Columbia Sportswear Co
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173
4030
4010
1510
5010
4520
5510
4520
4030
2010
2530
2520
4520
3520
2540
3510
2540
2030
3510
2010
2540
2540
2550
2020
2550
2530
2540
4520
5510
4030
4020
2520
3520
2010
3520
2520
1510
4520
2020
1010
1010
1510
2020
2530
4010
2520
1510
4510
Insurance
Banks
Materials
Telecommunication Services
Technology Hardware & Equip
Utilities
Technology Hardware & Equip
Insurance
Capital Goods
Hotels Restaurants & Leisure
Consumer Durables & Apparel
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Pharmaceuticals & Biotech
Media
Health Care Equipment & Svcs
Media
Transportation
Health Care Equipment & Svcs
Capital Goods
Media
Media
Retailing
Commercial Svcs & Supplies
Retailing
Hotels Restaurants & Leisure
Media
Technology Hardware & Equip
Utilities
Insurance
Diversified Financials
Consumer Durables & Apparel
Pharmaceuticals & Biotech
Capital Goods
Pharmaceuticals & Biotech
Consumer Durables & Apparel
Materials
Technology Hardware & Equip
Commercial Svcs & Supplies
Energy
Energy
Materials
Commercial Svcs & Supplies
Hotels Restaurants & Leisure
Banks
Consumer Durables & Apparel
Materials
Software & Services
408
409
410
411
412
413
414
415
416
417
418
419
420
421
422
423
424
425
426
427
428
429
430
431
432
433
434
435
436
437
438
439
440
441
442
443
.
444
445
446
447
448
449
450
451
452
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454
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638
564
515
471
475
347
246
785
412
478
414
649
362
406
539
548
521
281
572
535
373
205
750
421
210
591
486
218
481
607
527
561
664
500
575
513
495
619
576
296 RSG
181 AES
EV
CZN
JHF
705 ZBRA
TMK
274 MAT
FVB
901 SCRI
ERIE
551 VAL
845 CEPH
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940 IVX
654 LEN
645 DCI
748 ATK
NXTP
430 WEN
604 BEC
536 PLL
794 EXBD
BNK
RGC
452 MGG
704 STR
772 GTK
519 FO
CB
922 WDC
769 CAKE
155 MAY
ENR
523 CNX
208 TSG
462 DV
535 REV
690 PAX
362 DL
MKL
VLY
732 ESI
PKG
UDI
888 SRCL
891 ICST
Republic Services Inc
AES Corp. (The)
Eaton Vance Corp
Citizens CommunicationsCo
Hancock John Finl Svcs Inc
Zebra TechnologiesCp
A
-Cl
Torchmark Corp
Mattel Inc
First Virginia Banks Inc
Sicor Inc
Erie IndemnityCo -CIA
Valspar Corp
Cephalon Inc
Aon Corp
Ivax Corp
Lennar Corp
DonaldsonCo Inc
Alliant TechsystemsInc
Nextel Partners Inc
Wendy'S InternationalInc
Beckman Coulter Inc
Pall Corp
Corporate ExecutiveBrd Co
BanknorthGroup Inc
Regal EntertainmentGroup
Mgm Mirage
Questar Corp
Gtech HoldingsCorp
Fortune Brands Inc
Chubb Corp
Western Digital Corp
CheesecakeFactory Inc
May DepartmentStores Co
EnergizerHIdgs Inc
Consol Energy Inc
Sabre HIdgs Corp -CIA
Devry Inc
Revlon Inc -CIA
Paxson Comm Corp -Cl A
Dial Corporation
Markel Corp
Valley National Bancorp
Itt EducationalSvcs Inc
PackagingCorp Of America
United Defense Industries
Stericycle Inc
IntegratedCircuit Systems
174
2020
5510
4020
5010
4030
4520
4030
2520
4010
3520
4030
1510
3520
4030
3520
2520
2010
2010
5010
2530
3510
2010
2020
4010
2540
2530
5510
2530
2520
4030
4520
2530
2550
3030
1510
2020
2020
3030
2540
3030
4030
4010
2020
1510
2010
2020
4520
Commercial Svcs & Supplies
Utilities
Diversified Financials
Telecommunication Services
Insurance
Technology Hardware & Equip
Insurance
Consumer Durables & Apparel
Banks
Pharmaceuticals & Biotech
Insurance
Materials
Pharmaceuticals & Biotech
Insurance
Pharmaceuticals & Biotech
Consumer Durables & Apparel
Capital Goods
Capital Goods
Telecommunication Services
Hotels Restaurants & Leisure
Health Care Equipment & Svcs
Capital Goods
Commercial Svcs & Supplies
Banks
Media
Hotels Restaurants & Leisure
Utilities
Hotels Restaurants & Leisure
Consumer Durables & Apparel
Insurance
Technology Hardware & Equip
Hotels Restaurants & Leisure
Retailing
Household & Personal Prods
Materials
Commercial Svcs & Supplies
Commercial Svcs & Supplies
Household & Personal Prods
Media
Household & Personal Prods
Insurance
Banks
Commercial Svcs & Supplies
Materials
Capital Goods
Commercial Svcs & Supplies
Technology Hardware & Equip
455
456
457
458
459
460
461
462
463
464
465
466
467
468
469
470
471
472
473
474
475
476
477
478
479
480
481
482
483
484
485
486
487
488
489
490
491
492
493
494
495
496
497
498
499
500
501
469
489
351 239
466
779
354 665
559 443
463
202
620 450
473
597
786
460
313
345
626
424
396
574
409
339
219
715
777 783
440 611
651
774
448
569 801
531 547
441
598
446
565
588 789
596 803
329 603
507 722
546 702
545 600
540 818
487 723
729 862
454
836
567 679
290
587
577 578
236
537
144
520 726
670
774
689
629
730 609
913
602
HHS
SVM
STZ
DHI
SNPS
NSC
ICOS
NATI
CFFN
AAP
JNY
STU
VC1
CIF
CAL
NVDA
ADTN
MAN
BER
FNF
IFIN
MRX
JW.A
UHS
CXR
APP13
PETM
MHK
REY
HLR
LEE
PHM
TLB
UGI
PIR
PSC
BSG
MIL
JNS
ADS
COF
HSIC
STN
HBAN
FULT
LYO
PETC
Harte Hanks Inc
ServicemasterCo
Constellation Brands
A
-Cl
DR Horton Inc
SynopsysInc
Norfolk Southern Corp
Icos Corp
National InstrumentsCorp
Capitol Federal Financial
Advance Auto Parts
Jones Apparel Group Inc
Student Loan Corp
Valassis CommunicationsInc
Charter One Finl Inc
ContinentalAirls Inc
B
-Cl
Nvidia Corp
Adtran Inc
Manpower Inc/Wi
Berkley (W R) Corp
Fidelity National Finl Inc
Investors Financial Svcs Cp
Medicis PharmaceutCp -Cl A
Wiley (John) & Sons -Cl A
Universal Health Svcs -Cl B
Cox Radio Inc -CI A
Applebees Intl Inc
Petsmart Inc
Mohawk IndustriesInc
Reynolds & Reynolds -Cl A
Hollinger Intl Inc -Cl A
Lee Enterprises
Pulte Homes Inc
Talbots Inc
Ugi Corp
Pier 1 Imports Inc/De
PhiladelphiaSuburbanCorp
Bisys Group Inc
Millipore Corp
Janus Capital Group Inc
Alliance Data Systems Corp
Capital One Fini Corp
Schein Henry Inc
Station Casinos Inc
HuntingtonBancshares
Fulton Financial Corp
Lyondell ChemicalCo
Petco Animal Supplies Inc
175
2540
2020
3020
2520
4510
2030
3520
4510
4010
2550
2520
4020
2020
4010
2030
4520
4520
2020
4030
4030
4020
3520
2540
3510
2540
2530
2550
2520
2020
2540
2540
2520
2550
5510
2550
5510
2020
3510
4020
2020
4020
3510
2530
4010
4010
1510
2550
Media
CommercialSvcs& Supplies
Food Beverage& Tobacco
ConsumerDurables& Apparel
Software& Services
Transportation
Pharmaceuticals& Biotech
Software& Services
Banks
Retailing
ConsumerDurables& Apparel
DiversifiedFinancials
CommercialSvcs& Supplies
Banks
Transportation
TechnologyHardware& Equip
TechnologyHardware& Equip
CommercialSvcs& Supplies
Insurance
Insurance
DiversifiedFinancials
Pharmaceuticals& Biotech
Media
HealthCare Equipment& Svcs
Media
Hotels Restaurants& Leisure
Retailing
ConsumerDurables& Apparel
CommercialSvcs& Supplies
Media
Media
ConsumerDurables& Apparel
Retailing
Utilities
Retailing
Utilities
CommercialSvcs & Supplies
HealthCare Equipment& Svcs
DiversifiedFinancials
CommercialSvcs & Supplies
DiversifiedFinancials
HealthCare Equipment& Svcs
Hotels Restaurants& Leisure
Banks
Banks
Materials
Retailing
502
503
504
505
506
507
508
509
510
511
512
513
514
515
516
517
518
519
520
521
522
523
524
525
526
527
528
529
530
531
532
533
534
535
536
537
538
539
540
541
542
543
544
545
546
547
548
592
635
434
542
566
552
703
650
676
458
87
728
534
405
816
525
568
736
778
585
468
573
242
781
533
666
512
636
735
550
706
488
403
639
608
377
711
595
748
543
644
764
623
439
562
605
686
541 HNI
643 LANC
899 MIK
WL
CBSH
681 RCI
780 ATG
AMTD
686 CHK
MRBK
70 SWY
767 SMG
MCY
471 WHR
814 SNDK
823 WSTC
596 ORLY
LUK
788 STK
402 HUB.13
483 RL
612 MEG
LNC
GPT
701 RDC
683 CHD
520 MLHR
727 MDU
984 KSE
CYN
590 VHI
633 ALE
BE
629 NFG
753 SFD,
333 NUE
321 WWCA
571 BLC
671 PSUN
529 CEG
530 WEC
SAFC
856 PFGC
878 HNT
544 NBL
570 CBT
341 BR
Hon Industries
Lancaster Colony Corp
Michaels Stores Inc
Wilmington Trust Corp
Commerce BancsharesInc
Renal Care Group Inc
AgI Resources Inc
Ameritrade Holding Corp
Chesapeake EnergyCorp
Mercantile BanksharesCorp
Safeway Inc
Scoffs Co
Mercury General Corp
Whirlpool Corp
Sandisk Corp
West Corp
0 Reilly Automotive Inc
Leucadia NationalCorp
Storage TechnologyCp
Hubbell Inc -CI B
Polo Ralph Lauren Cp -Cl A
Media General -CIA
Lincoln NationalCorp
Greenpoint FinancialCorp
Rowan Cos Inc
Church & Dwight Inc
Miller (Herman) Inc
Mdu ResourcesGroup Inc
Keyspan Corp
City National Corp
Valhi Inc
Allete Inc
BearingpointInc
National Fuel Gas Co
Smithfield Foods Inc
Nucor Corp
Western Wireless Corp -Cl A
Belo Corp -Ser A Com
Pacific SunwearCalif Inc
ConstellationEnergyGrp Inc
Wisconsin Energy Corp
Safeco Corp
PerformanceFood Group Co
Health Net Inc - Cl A
Noble Energy Inc
Cabot Corp
Burlington ResourcesInc
176
2020
3020
2550
4010
4010
3510
5510
4020
1010
4010
3010
1510
4030
2520
4520
2020
2550
4020
4520
2010
2520
2540
4030
4010
1010
3030
2020
5510
5510
4010
1510
2010
4510
5510
3020
1510
5010
2540
2550
5510
5510
4030
3010
3510
1010
1510
1010
Commercial Svcs & Supplies
Food Beverage & Tobacco
Retailing
Banks
Banks
Health Care Equipment & Svcs
Utilities
Diversified Financials
Energy
Banks
Food & Drug Retailing
Materials
Insurance
Consumer Durables & Apparel
Technology Hardware & Equip
Commercial Svcs & Supplies
Retailing
Diversified Financials
Technology Hardware & Equip
Capital Goods
Consumer Durables & Apparel
Media
Insurance
Banks
Energy
Household & Personal Prods
Commercial Svcs & Supplies
Utilities
Utilities
Banks
Materials
Capital Goods
Software & Services
Utilities
Food Beverage & Tobacco
Materials
Telecommunication Services
Media
Retailing
Utilities
Utilities
Insurance
Food & Drug Retailing
Health Care Equipment & Svcs
Energy
Materials
Energy
549
550
551
552
553
554
555
556
557
558
559
560
561
562
563
564
565
566
567
568
569
570
571
572
573
574
575
576
577
755
652
648
773
731
716
610
618
797
744
482
612
621
625
391
498
465
616
530
514
511
609
614
758
690
654
668
324
779
751 WERN
737 GYI
787 CBRL
793 J1BHT
668 GXP
EW
CRL
606 OCR
240 ROK
810 ARG
482 SON
618 NFX
619 NST
744 IDC
502 DPL
457 SFA
297 JWN
591 SWFT
638 HLYW
782 RI
850 ELX
XJT
664 MTD
567 CSL
653 JDEC
FTI
800 VVC
433 CVG
BOH
578
579
580
581
582
583
584
585
586
587
588
589
590
591
592
593
594
763
547
427
681
493
557
687
683
770
918
630
633
672
283
289
662
720
MCCC
CAM
ZION
CFR
CTX
GRP
PPDI
AME
CLE
CKFR
RYL
HSC
KEG
MTG
CDN
HCC
PNY
736
463
834
764
505
406
898
680
943
481
731
Werner EnterprisesInc
Getty Images Inc
Cbrl Group Inc
Hunt (Jb) Transprt Svcs Inc
Great Plains Energy Inc
Edwards LifesciencesCorp
Charles River Labs Intl Inc
Omnicare Inc
RockwellAutomation
Airgas Inc
Sonoco ProductsCo
Newfield ExplorationCo,
Nstar
InteractiveData Corp
DpI Inc
Scientific-AtlantaInc
NordstromInc
Swift TransportationCo,Inc
HollywoodEntmt Corp
Ruby Tuesday Inc
Emulex Corp
ExpressjetHoldings Inc
Mettler-ToledoIntl Inc
Carlisle Cos Inc
EdwardsJD& Co
Fmc TechnologiesInc
Vectren Corp
ConvergysCorp
Bank Of Hawaii Corp
MediacomCommunications
Corp
Cooper Cameron Corp
Zions Bancorporation
Cullen/FrostBankers Inc
Centex Corp
Grant Prideco Inc
PharmaceuticalProd Dev Inc
Ametek Inc
Claires Stores Inc
Checkfree Corp
Ryland Group Inc
Harsco Corp
Key Energy Services Inc
Mgic InvestmentCorp/Wi
Cadence Design Sys Inc
Hcc Ins HIdgs Inc
Co
Gas
Natural
Piedmont
177
2030
2540
2530
2030
5510
3510
3520
3510
2010
1510
1510
1010
5510
2540
5510
4520
2550
2030
2550
2530
4520
2030
4520
2010
4510
1010
5510
2020
4010
Transportation
Media
Hotels Restaurants& Leisure
Transportation
Utilities
HealthCare Equipment& Svcs
Pharmaceuticals& Biotech
HealthCare Equipment& Svcs
CapitalGoods
Materials
Materials
Energy
Utilities
Media
Utilities
TechnologyHardware& Equip
Retailing
Transportation
Retailing
HotelsRestaurants& Leisure
TechnologyHardware& Equip
Transportation
TechnologyHardware& Equip
CapitalGoods
Software& Services
Energy
Utilities
CommercialSvcs& Supplies
Banks
2540
1010
4010
4010
2520
1010
3510
2010
2550
2020
2520
2010
1010
4030
4510
4030
5510
Media
Energy
Banks
Banks
ConsumerDurables& Apparel
Energy
HealthCare Equipment& Svcs
CapitalGoods
Retailing
CommercialSvcs & Supplies
ConsumerDurables& Apparel
CapitalGoods
Energy
Insurance
Software& Services
Insurance
Utilities
595
596
597
598
599
600
601
602
603
604
605
606
607
608
609
610
611
612
613
614
615
616
617
618
619
620
621
622
623
624
625
626
627
628
629
630
631
632
633
634
635
636
637
638
639
640
641
688
597
701
479
658
882
504
476
528
772
600
768
617
718
637
339
738
496
137
788
678
694
714
659
737
294
517
726
708
671
395
835
697
752
396
696
803
888
685
754
771
749
742
817
669
692
474
694
953
390
658
777
835
409
461
925
709
831
871
674
228
696
684
285
129
880
177
697
691
318
323
552
868
934
369
824
712
932
714
863
742
670
799
747
676
830
980
828
85
HIB
ADSK
WGR
AOT
LZ
WR
TOL
KMG
AEOS
HOV
KBH
SJM
VRC
RPM
ONNN
MYG
PGL
MBG
SEBL
NWL
NBTY
BNI
ALB
AHG
CYCL
PCG
TFX
BOKF
GREY
TEK
DO
SBGI
ATR
AGI
NCC
RGS
EGN
SIRI
BTH
STE
WGL
CYT
WPS
PXD
MDC
BSC
CA
Hibernia Corp
-CIA
Autodesk Inc
Western Gas ResourcesInc
Apogent Technologies Inc
Lubrizol Corp
Westar Energy Inc
Toll Brothers Inc
Kerr-McgeeCorp
Amern Eagle Outfitters Inc
Hovnanian Entrprs Inc
A
-Cl
Kb Home
Smucker (Jm) Co
Varco InternationalInc
Rpm InternationalInc
On SemiconductorCorp
Maytag Corp
Peoples Energy Corp
Mandalay Resort Group
Siebel Systems Inc
Newell RubbermaidInc
Nbty Inc
BurlingtonNorthern Santa Fe
Albemarle Corp
Apria HealthcareGroup
CentennialCommun Cp -CIA
Pg&E Corp
Teleflex Inc
Bok FinancialCorp
Grey Global Group Inc
Tektronix Inc
DiamondOffshre Drilling Inc
Sinclair BroadcastGp -Cl A
Aptargroup Inc
Alliance Gaming Corp
NationalCity Corp
Regis Corp/Mn
EnergenCorp
Sirius Satellite Radio Inc
Blyth Inc
Steris Corp
WgI Holdings Inc
Cytec IndustriesInc
Wps ResourcesCorp
Pioneer Natural ResourcesCo
Mdc Holdings Inc
Bear Stearns CompaniesInc
ComputerAssociates Intl Inc
178
4010
4510
1010
3510
1510
5510
2520
1010
2550
2520
2520
3020
1010
1510
4520
2520
5510
2530
4510
2520
3030
2030
1510
3510
5010
5510
2010
4010
2540
4520
1010
2540
1510
2530
4010
2550
5510
2540
2520
3510
5510
1510
5510
1010
2520
4020
4510
Banks
Software& Services
Energy
HealthCare Equipment& Svcs
Materials
Utilities
ConsumerDurables& Apparel
Energy
Retailing
ConsumerDurables& Apparel
ConsumerDurables& Apparel
Food Beverage& Tobacco
Energy
Materials
TechnologyHardware& Equip
ConsumerDurables& Apparel
Utilities
Hotels Restaurants& Leisure
Software& Services
ConsumerDurables& Apparel
Household& PersonalProds
Transportation
Materials
HealthCare Equipment& Svcs
TelecommunicationServices
Utilities
CapitalGoods
Banks
Media
TechnologyHardware& Equip
Energy
Media
Materials
Hotels Restaurants& Leisure
Banks
Retailing
Utilities
Media
ConsumerDurables& Apparel
HealthCare Equipment& Svcs
Utilities
Materials
Utilities
Energy
ConsumerDurables& Apparel
DiversifiedFinancials
Software& Services
642
643
644
645
646
647
648
649
650
651
652
653
654
655
656
657
658
659
660
661
662
663
664
665
666
667
668
669
670
671
672
673
674
675
676
677
678
679
680
681
682
683
684
685
686
687
688
767
634
784
759
587
215
632
820
795
747
300
551
613
796
208
840
677
397
745
418
741
792
606
894
809
599
722
815
906
852
560
857
762
775
808
791
598
812
655
721
693
398
780
757
739
383
695
906 TKR
410 NI
PCO
487
513
357
265
894
785
792
649
775
642
626
685
920
660
752
549
384
740
405
661
981
858
768
826
707
933
849
595
914
746
632
820
251
440
SE
PNR
BRCD
SSCC
HAS
RBK
WCN
MBI
SCHL
RKY
ATO
KG
PBCT
OGE
AMKR
PL
AGE
BYD
PSID
AXL
XMSR
BGG
BDK
SXT
SEM
PRM
FAF
CMH
OLN
CMLS
ASBC
COKE
BKH1
LZB
BTU
NOI
HE
ZLC
LRCX
WOR
SNA
RYN
MRO
HTV
Timken Co
Nisource Inc
Premcor Inc
7-Eleven Inc
Pentair Inc
Brocade CommunicationsSys
Smurfit-StoneContainerCorp
Hasbro Inc
Reebok InternationalLtd
Waste ConnectionsInc
Mbia Inc
Scholastic Corp
Coors (Adolph)
B
-Cl
Atmos Energy Corp
King PharmaceuticalsInc
Peoples Bank BridgeportCt
Oge Energy Corp
Amkor TechnologyInc
Protective Life Corp
Edwards (A G) Inc
Boyd Gaming Corp
Puget Energy Inc
American Axle & Mfg Hldgs
Xm Satellite Radio Hldgs Inc
Briggs & Stratton
Black & Decker Corp
SensientTechnologiesCorp
Select Medical Corp
Primedia Inc
First American Corp/Ca
Clayton Homes Inc
Olin Corp
Cumulus Media Inc
Associated Banc Corp
Coca-Cola BtIng Cons
Black Hills Corp
La-Z-Boy Inc
Peabody Energy Corp
National-OilwellInc
Hawaiian Electdc Inds
Zale Corp
Lam ResearchCorp
Worthington Industries
Snap-On Inc
Rayonier Inc
Marathon oil Corp
Hearst-ArgyleTelevision
179
2010
5510
1010
3010
2010
4520
1510
2520
2520
2020
4030
2540
3020
5510
3520
4010
5510
4520
4030
4020
2530
5510
2510
2540
2010
2520
3020
3510
2540
4030
2520
1510
2540
4010
3020
5510
2520
1510
1010
5510
2550
4520
1510
2520
1510
1010
2540
Capital Goods
Utilities
Energy
Food & Drug Retailing
Capital Goods
TechnologyHardware& Equip
Materials
ConsumerDurables& Apparel
ConsumerDurables& Apparel
CommercialSvcs & Supplies
Insurance
Media
Food Beverage& Tobacco
Utilities
Pharmaceuticals& Biotech
Banks
Utilities
TechnologyHardware& Equip
Insurance
DiversifiedFinancials
HotelsRestaurants& Leisure
Utilities
Automobiles& Components
Media
CapitalGoods
ConsumerDurables& Apparel
Food Beverage& Tobacco
HealthCare Equipment& Svcs
Media
Insurance
ConsumerDurables& Apparel
Materials
Media
Banks
Food Beverage& Tobacco
Utilities
ConsumerDurables& Apparel
Materials
Energy
Utilities
Retailing
TechnologyHardware& Equip
Materials
ConsumerDurables& Apparel
Materials
Energy
Media
689
690
691
692
693
694
695
696
697
698
699
700
701
702
703
704
705
706
707
708
709
710
711
712
578
675
582
725
364
765
727
843
761
724
499
443
509
455
539
659
545
503
679
710
698
641
682
793
422
790
667
789
400
639
945
713
714
715
716
717
718
719
720
721
722
723
724
725
726
727
728
729
730
731
732
733
734
735
801
855
743
66
419
707
571
356
753
805
647
594
858
494
699
822
645
549
884
523
367
868
320
358
816
897
700
797
375
881
624
725
419
478
215
80
918
426
971
743
875
466
284
741
720
534
479
HCR
CR
GAS
CK
SWK
TPC
SLGN
ROAD
GET
NMG.A
CYH
DNY
UTR
TVL
MLM
PSS
PDE
ROIAK
AGY
SKYF
AVX
FOE
NAV
DQE
Manor Care Inc
Crane Co
Nicor Inc
Crompton Corp
Stanley Works
Triton Pcs HIdgs Inc
Silgan Holdings Inc
Roadway Corp
Gaylord Entertainment
Neiman-MarcusGroup Inc
Community Health SystemsInc
Donnelley (R R) & Sons Co
Unitrin Inc
Lin Tv Corp
Martin Marietta Materials
Payless ShoesourceInc
Pride InternationalInc
Radio One Inc
Argosy Gaming Corp
Sky Financial Group Inc
Avx Corp
Ferro Corp
Navistar Internationl
Dqe Inc
BOL
WRC
KSU
EDS
IRF
ORI
EMN
NSM
EMMS
UW
Bausch & Lomb Inc
Westport Resources Corp
Kansas City Southern
Electronic Data Systems Corp
Intl Rectifier Corp
Old Republic Intl Corp
Eastman Chemical Co
National Semiconductor Corp
Emmis Communictns Cp -CIA
Universal CorpNa
Pepco Holdings Inc
Winn-Dixie Stores Inc
Borg Warner Inc
Radian Group Inc
Harris Corp
Cnf Inc
Linens N Things Inc
Pmi Group Inc
Regions Finl Corp
Readers Digest Assn
Bjs Wholesale Club Inc
Jo-Ann Stores Inc -Cl A
Spx Corp
POM
WIN
BWA
RDN
HRS
CNF
LIN
PIVII
354
473
919
569
RF
RDA
BJ
JAS. A
SPW
180
3510
2010
5510
1510
2520
5010
1510
2030
2530
2550
3510
2020
4030
2540
1510
2550
1010
2540
2530
4010
4520
1510
2010
5510
3510
1010
2030
4510
4520
4030
1510
4520
2540
3020
5510
3010
2510
4030
4520
2030
2550
4030
4010
2540
2550
2550
2010
Health Care Equipment & Svcs
Capital Goods
Utilities
Materials
Consumer Durables & Apparel
Telecommunication Services
Materials
Transportation
Hotels Restaurants & Leisure
Retailing
Health Care Equipment & Svcs
Commercial Svcs & Supplies
Insurance
Media
Materials
Retailing
Energy
Media
Hotels Restaurants & Leisure
Banks
Technology Hardware & Equip
Materials
Capital Goods
Utilities
Health Care Equipment & Svcs
Energy
Transportation
Software & Services
Technology Hardware & Equip
Insurance
Materials
Technology Hardware & Equip
Media
Food Beverage & Tobacco
Utilities
Food & Drug Retailing
Automobiles & Components
Insurance
Technology Hardware & Equip
Transportation
Retailing
Insurance
Banks
Media
Retailing
Retailing
Capital Goods
736
737
738
739
740
741
742
743
744
745
746
747
748
749
750
751
752
753
754
755
756
757
758
759
760
761
762
763
764
765
766
767
768
769
770
771
772
773
774
775
776
777
778
779
780
781
782
717
807
776
838
819
733
800
628
296
305
914
898
851
760
282
467
846
828
902
830
818
863
799
806
732
841
833
869
834
842
827
867
823
896
590
769
848
660
656
864
734
829
740
847
558
831
892
778
902
669
380
695
829
588
500
525
364
628
754
368
804
955
378
472
885
923
504
837
948
847
964
889
795
965
841
909
938
446
825
821
689
607
882
985
977
844
593
912
GPI
SPF
ANN
SBL
CAO
CNL
BOW
FIVIER
TDS
XEL
HPC
LII
ABF
IDA
TER
ISIL
SUG
ACI
RAD
GLK
WSC
WBS
BZH
ACXM
PCP
KMT
MXO
OKE
IPX
SWX
TMO
ATAH
ISLE
BWS
BKS
FST
AEN
LNT
IBC
ICCI
ESA
AG
DVA
PCH
ARM
MEE
PCU
Group 1 Automotive Inc
Standard Pacific Cp
Anntaylor Stores Corp
Symbol Technologies
Csk Auto Corp
Cleco Corp
Bowater Inc
Firstmerit Corp
Telephone & Data
Xcel Energy Inc
Hercules Inc
Lennox International Inc
Airborne Inc
Idacorp Inc
Teradyne Inc
Intersil Corp
-CIA
Southern Union Co
Arch Coal Inc
Rite Aid Corp
Great Lakes Chemical Corp
Wesco Financial Corp
Webster Financial Corp
Beazer Homes Usa Inc
Acxiom Corp
Precision Castparts Corp
Kennametal Inc
Maxtor Corp
Oneok Inc
Interpool Inc
Southwest Gas Corp
Thermo Electron Corp
Ata Holdings Corp
isle Of Capri Casinos Inc
Brown Shoe Inc
Barnes & Noble Inc
Forest Oil Corp
Amc Entertainment Inc
Alliant Energy Corp
Interstate Bakeries Cp
Insight Communications Inc
Extended Stay America Inc
Agco Corp
Davita Inc
Potlatch Corp
Arvinmeritor Inc
Massey Energy Co
Southern Peru Copper
181
2550
2520
2550
4520
2550
5510
1510
4010
5010
5510
1510
2010
2030
5510
4520
4520
5510
1510
3010
1510
2020
4010
2520
4510
2010
2010
4520
5510
2020
5510
4520
2030
2530
2520
2550
1010
2540
5510
3020
2540
2530
2010
3510
1510
2510
1510
1510
Retailing
Consumer Durables & Apparel
Retailing
Technology Hardware & Equip
Retailing
Utilities
Materials
Banks
Telecommunication Services
Utilities
Materials
Capital Goods
Transportation
Utilities
Technology Hardware & Equip
Technology Hardware & Equip
Utilities
Materials
Food & Drug Retailing
Materials
Commercial Svcs & Supplies
Banks
Consumer Durables & Apparel
Software & Services
Capital Goods
Capital Goods
Technology Hardware & Equip
Utilities
Commercial Svcs & Supplies
Utilities
Technology Hardware & Equip
Transportation
Hotels Restaurants & Leisure
Consumer Durables & Apparel
Retailing
Energy
Media
Utilities
Food Beverage & Tobacco
Media
Hotels Restaurants & Leisure
Capital Goods
Health Care Equipment & Svcs
Materials
Automobiles & Components
Materials
Materials
783
784
785
786
787
788
789
790
791
792
793
794
795
796
797
798
799
800
801
802
803
804
805
806
807
808
809
810
811
812
813
814
815
816
817
818
819
820
821
822
823
824
825
826
827
828
829
665
277
746
870
861
519
622
871
709
663
813
927
877
897
715
444
891
811
702
589
878
810
856
798
825
844
845
604
824
584
874
794
883
723
653
890
684
502
802
895
642
849
893
885
860
854
756
515
TIN
CMA
893 VLO
873 R
819 VPI
582 AN
857 TDW
692 PZ13
663 JBX
WC1
647 BCC
326 WP1
924 CNJ
577 SUN
883 BGP
FCS
161 BMC
AF
518 LEA
887 TTN
846 IVGN
389 IM
585 PKI
363 ATI
ABG
710 TEX
954 UAG
892 SAH
944 CHRS
KEY
990 GHVI
759 BC
886 AVA
666 CTB
634 LAF
808 ALK
UPC
839 TECD
557 EAS
966 OSG
852 FLS
876 URS
928 CPO
UCO
805 NOR
376 Sol
706 PNW
Temple-Inland Inc
Comerica Inc.
Valero Energy Corp
Ryder System Inc
Vintage Petroleum Inc
Autonation Inc
Tidewater Inc
Pittston Co,
Jack In The Box Inc
Wci Communities Inc
Boise Cascade Corp
Watson Pharmaceuticals Inc
Cole National Corp
Sunocolnc
Borders Group Inc
Fairchild Semiconductor Intl
Bmc Software Inc
Astoria Finl Corp
Lear Corp
Titan Corp
Invitrogen Corp
Ingram Micro Inc -Cl A
Perkinelmer Inc
Allegheny Technologies Inc
Asbury Automotive Group Inc
Terex Corp
United Auto Group Inc
Sonic Automotive Inc -CIA
Charming Shoppes
Keycorp
Genesis Health Ventures Inc
Brunswick Corp
Avista Corp
Cooper Tire & Rubber
Lafarge North America Inc
Alaska Air Group Inc
Union Planters Corp
Tech Data Corp
Energy East Corp
Overseas Shipholding Group
Flowserve Corp
Urs Corp
Corn Products Intl Inc
Universal Compression Hldgs
Northwestern Corp
Solutia Inc
Pinnacle West Capital
182
1510
4010
1010
2030
1010
2550
1010
2020
2530
2520
1510
3520
2550
1010
2550
4520
4510
4010
2510
4510
3520
4520
4520
1510
2550
2010
2550
2550
2550
4010
3510
2520
5510
2510
1510
2030
4010
4520
5510
1010
2010
2010
3020
1010
5510
1510
5510
Materials
Banks
Energy
Transportation
Energy
Retailing
Energy
Commercial Svcs & Supplies
Hotels Restaurants & Leisure
Consumer Durables & Apparel
Materials
Pharmaceuticals & Biotech
Retailing
Energy
Retailing
Technology Hardware & Equip
Software & Services
Banks
Automobiles & Components
Software & Services
Pharmaceuticals & Biotech
Technology Hardware & Equip
Technology Hardware & Equip
Materials
Retailing
Capital Goods
Retailing
Retailing
Retailing
Banks
Health Care Equipment & Svcs
Consumer Durables & Apparel
Utilities
Automobiles & Components
Materials
Transportation
Banks
Technology Hardware & Equip
Utilities
Energy
Capital Goods
Capital Goods
Food Beverage & Tobacco
Energy
Utilities
Materials
Utilities
830
831
832
833
834
835
836
837
838
839
840
841
842
843
844
845
846
847
848
849
850
851
852
853
854
855
856
857
858
859
860
861
862
863
864
865
866
867
868
869
870
871
872
873
874
875
876
826
909
327
787
627
411
933
836
712
875
456
917
529
910
922
900
915
615
311
170
923
580
866
862
919
872
912
505
908
928
907
408
680
889
643
987
850
925
920
880
887
944
873
905
924
984
657
907
842
160
572
219
411
784
860
648
580
976
773
950
349
963
927
300
275
766
721
749
949
813
735
621
915
209
951
939
174
673
935
982
851
960
602
272
657
904
903
171
942
PBY
DRRA
DPH
SCS
IP
ADM
TWTC
POL
CKC
TN13
SVU
UNS
CY
DTG
USG
ARW
OMX
CEN
AAPL
HIG
ALO
TRI
PAS
YRK
NC
BFT
AV
OMG
LPX
SOV
UHAL
CSC
MGM
TSO
CPWR
AET
NU
PNM
AM
CQB
CPC
CMVT
ASH
GAP
CUM
HAL
VSH
Pep Boys-Manny Moe & Jack
Dura Automotive Sys -Cl B
Delphi Corp
Steelcase Inc
Intl Paper Co
Arch er-Dan iels-M idland Co
Time Warner Telecom Inc
Polyone Corp
Collins & Aikman Corp
Thomas & Betts Corp
Supervalu Inc
Unisource Energy Corp
Cypress Semiconductor Corp
Dollar Thrifty Automotive Gp
Usg Corp
Arrow Electronics Inc
Officemax Inc
Ceridian Corp
Apple Computer Inc
Hartford Fini Svcs Grp Inc
Alpharma Inc -CIA
Triad Hospitals Inc
Pepsiamericas Inc
York Intl
Nacco Industries -Cl A
Bally Total Fitness HIdg Cp
Avayalnc
Om Group Inc
Louisiana-Pacific Corp
Sovereign Bancorp Inc
Amerco
Computer Sciences Corp
Metro Goldwyn Mayer Inc
Tesoro Petroleum Corp
Compuware Corp
Aetna Inc
Northeast Utilities
Prim Resources Inc
American Greetings
A
-CI
Chiquita Brands Intl
Central Parking Corp
Comverse Technology Inc
Ashland Inc
Great Atlantic & Pac Tea Co
Cummins Inc
Halliburton Co
Vishay Intirtechnology
183
2550
2510
2510
2020
1510
3020
5010
1510
2510
2010
3010
5510
4520
2030
2010
4520
2550
2020
4520
4030
3520
3510
3020
2010
2010
2530
4520
1510
1510
4010
2030
4510
2540
1010
4510
3510
5510
5510
2520
3020
2020
4520
1010
3010
2010
1010
4520
Retailing
Automobiles & Components
Automobiles & Components
Commercial Svcs & Supplies
Materials
Food Beverage & Tobacco
Telecommunication Services
Materials
Automobiles & Components
Capital Goods
Food & Drug Retailing
Utilities
Technology Hardware & Equip
Transportation
Capital Goods
Technology Hardware & Equip
Retailing
Commercial Svcs & Supplies
Technology Hardware & Equip
Insurance
Pharmaceuticals & Biotech
Health Care Equipment & Svcs
Food Beverage & Tobacco
Capital Goods
Capital Goods
Hotels Restaurants & Leisure
Technology Hardware & Equip
Materials
Materials
Banks
Transportation
Software & Services
Media
Energy
Software & Services
Health Care Equipment & Svcs
Utilities
Utilities
Consumer Durables & Apparel
Food Beverage & Tobacco
Commercial Svcs & Supplies
Technology Hardware & Equip
Energy
Food & Drug Retailing
Capital Goods
Energy
Technology Hardware & Equip
877
878
879
880
881
882
883
884
885
886
887
888
889
890
891
892
893
894
895
896
897
898
899
900
901
902
903
904
905
906
907
908
909
910
911
912
913
914
915
916
917
918
919
920
921
922
923
433
935
940
804
839
904
911
879
691
931
308
946
949
865
947
966
853
407
988
253
333
859
899
886
962
952
553
916
913
415
510
953
932
929
942
705
903
950
977
945
934
937
386
930
979
193
497
516 TE
ANAT
996 AWGI
877 HUM
386 SPOT
975 BEV
757 TWR
554 NCR
414 USM
581 STEI
556 MLNM
763 SRP
566 TEN
908 AVT
474 CCI
398 AMT
637 DLM
165 TXT
231 GMST
970 NOC
561 TMPW
490 URI
865 IKN
555 PKS
279 DAL
583 ALV
310 EIX
811 FMC
328 CSX
630 ATIVIL
277 ODP
992 WLT
995 FL
969 PPE
492 BLI
417 TSN
614 ILA
991 AMD
PVN
930 DDS
442 SKS
79 TLAB
172 BRCM
761 AKS
315 AMR
146 IPG
260 CC
Teco Energy Inc
American National Insurance
Alderwoods Group Inc
Humana Inc
Panamsat Corp
Beverly Enterprises
Tower Automotive Inc
Ncr Corp
Us Cellular Corp
Stewart Enterprises
A
-Cl
Millennium PharmactclsInc
Sierra Pacific Resources
Tenneco Automotive Inc
Avnet Inc
Crown Castle Intl Corp
American Tower Corp
Del Monte Foods Co
Textron Inc
Gemstar-TvGuide Intl Inc
Northrop GrummanCorp
Tmp Worldwide Inc
United Rentals Inc
Ikon Office Solutions
Six Flags Inc
Delta Air Lines Inc
Autoliv Inc
Edison International
Fmc Corp
CSX Corp
Atmel Corp
Office Depot Inc
Walter IndustriesInc
Foot Locker Inc
Park Place Entmt Corp
Big Lots Inc
Tyson Foods Inc -Cl A
Aquila Inc
Advanced Micro Devices
Providian FinancialCorp
Dillards Inc -CIA
Saks Inc
Tellabs Inc
BroadcomCorp -Cl A
Ak Steel Holding Corp
AMR Corp/De
InterpublicGroup Of Cos
Circuit City Stores Inc
184
5510
4030
3510
3510
2540
3510
2510
4520
5010
3510
3520
5510
2510
4520
5010
5010
3020
2010
2540
2010
2020
2550
4520
2530
2030
2510
5510
1510
2030
4520
2550
2010
2550
2530
2550
3020
5510
4520
4020
2550
2550
4520
4520
1510
2030
2540
2550
Utilities
Insurance
Health Care Equipment & Svcs
Health Care Equipment & Svcs
Media
Health Care Equipment & Svcs
Automobiles & Components
Technology Hardware & Equip
Telecommunication Services
Health Care Equipment & Svcs
Pharmaceuticals & Biotech
Utilities
Automobiles & Components
Technology Hardware & Equip
Telecommunication Services
Telecommunication Services
Food Beverage & Tobacco
Capital Goods
Media
Capital Goods
Commercial Svcs & Supplies
Retailing
Technology Hardware & Equip
Hotels Restaurants & Leisure
Transportation
Automobiles & Components
Utilities
Materials
Transportation
Technology Hardware & Equip
Retailing
Capital Goods
Retailing
Hotels Restaurants & Leisure
Retailing
Food Beverage & Tobacco
Utilities
Technology Hardware & Equip
Diversified Financials
Retailing
Retailing
Technology Hardware & Equip
Technology Hardware & Equip
Materials
Transportation
Media
Retailing
924
925
926
927
928
929
930
931
932
933
934
935
936
937
938
939
940
941
942
943
944
945
946
947
948
949
950
951
952
953
954
955
956
957
958
959
960
961
962
963
964
965
966
967
968
969
970
969
938
901
88
967
948
601
603
358
321
968
959
536
939
941
963
821
970
195
783
961
640
957
964
199
94
951
955
926
936
943
974
971
490
975
392
973
346
985
522
989
782
98
164
983
956
972
968
627
235
42
946
994
342
137
730
233
353
130
699
464
399
622
997
105
258
420
488
508
989
191
41
771
337
331
543
359
217
497
114
89
999
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244
379
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XRX
CNP
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BA
VC
RRI
CHTR
United States Steel Corp
Allied Waste Inds Inc
Broadwing Inc
Ford Motor Co
Crown Holdings Inc
Fleming Companies Inc
Lsi Logic Corp
Agere Systems Inc
Cvs Corp
Meadwestvaco Corp
Unisys Corp
Quintiles Transnational Corp
Raytheon Co
Phelps Dodge Corp
Cms Energy Corp
Service Corp International
Calpine Corp
Wyndham Intl Inc
Kroger Co
Georgia-Pacific Corp
Ciena Corp
Amerada Hess Corp
Owens-Illinois Inc
IMC Global Inc
Micron Technology Inc
Sun Microsystems Inc
Monsanto Co
Goodrich Corp
Federated Dept Stores
Dana Corp
Toys R Us Inc
Goodyear Tire & Rubber Co
ADC Telecommunications Inc
Dynegylnc
Eastman Kodak Co
Loews Corp
Blockbuster Inc
Williams Cos Inc
Millennium Chemicals Inc
Sprint Fon Group
Xerox Corp
Centerpoint Energy Inc
El Paso Corp
Boeing Co
Visteon Corp
Reliant Resources Inc
Charter Communications Inc
185
1510
2020
5010
2510
1510
3010
4520
4520
3010
1510
4510
3510
2010
1510
5510
3510
5510
2530
3010
1510
4520
1010
1510
1510
4520
4520
1510
2010
2550
2510
2550
2510
4520
5510
2520
4030
2550
5510
1510
5010
4520
5510
5510
2010
2510
5510
2540
Materials
Commercial Svcs & Supplies
Telecommunication Services
Automobiles & Components
Materials
Food & Drug Retailing
Technology Hardware & Equip
Technology Hardware & Equip
Food & Drug Retailing
Materials
Software & Services
Health Care Equipment & Svcs
Capital Goods
Materials
Utilities
Health Care Equipment & Svcs
Utilities
Hotels Restaurants & Leisure
Food & Drug Retailing
Materials
Technology Hardware & Equip
Energy
Materials
Materials
Technology Hardware & Equip
Technology Hardware & Equip
Materials
Capital Goods
Retailing
Automobiles & Components
Retailing
Automobiles & Components
Technology Hardware & Equip
Utilities
Consumer Durables & Apparel
Insurance
Retailing
Utilities
Materials
Telecommunication Services
Technology Hardware & Equip
Utilities
Utilities
Capital Goods
Automobiles & Components
Utilities
Media
971
972
973
974
975
976
977
978
979
980
981
982
983
984
985
986
987
988
989
990
991
992
993
994
995
996
997
998
999
1000
79
987 THC
980
370 JCP
881
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228
533 TXU
526
307 SANM
126 SLR
876
990 291 HLTH
273
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117
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976
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249
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996 234 GM
56 MOT
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464
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1000
12 LU
999
997 223 JDSU
26 SBC
993
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998
Tenet HealthcareCorp
Penney (J C) Co
Mirant Corp
Txu Corp
Sanmina-SciCorp
Solectron Corp
WebMD Corp
Sears Roebuck & Co
Household InternationalInc
Prudential FinancialInc
RJ ReynoldsTobacco HIdgs
Bank One Corp
UnumprovidentCorp
Albertsons Inc
AT&T Wireless ServicesInc
McKessonCorp
Corning Inc
FleetbostonFinancialCorp
HoneywellInternationalInc
Wachovia Corp
Verisign Inc
Kindred HealthcareInc
General Motors Corp
Motorola Inc
JP Morgan Chase & Co
AOL Time Warner Inc
Lucent TechnologiesInc
JDS UniphaseCorp
SBC CommunicationsInc
AT&T Corp
186
3510
2550
5510
5510
4520
4520
3510
2550
4020
4030
3020
4010
4030
3010
5010
3510
4520
4010
2010
4010
4510
3510
2510
4520
4020
2540
4520
4520
5010
5010
Health Care Equipment& Svcs
Retailing
Utilities
Utilities
TechnologyHardware& Equip
TechnologyHardware& Equip
HealthCare Equipment& Svcs
Retailing
DiversifiedFinancials
Insurance
Food Beverage& Tobacco
Banks
Insurance
Food & Drug Retailing
TelecommunicationServices
Health Care Equipment& Svcs
TechnologyHardware& Equip
Banks
Capital Goods
Banks
Software& Services
HealthCare Equipment& Svcs
Automobiles& Components
TechnologyHardware& Equip
DiversifiedFinancials
Media
TechnologyHardware& Equip
TechnologyHardware& Equip
TelecommunicationServices
TelecommunicationServices