On the Examination of Value-Based Performance Measures: Evidence from Indian Firms

Abstract

There is a shift in focus from traditional accounting-based performance measures to the new value-based performance measures. With the rising focus on value-based performance measures which are derived from the long-term goal of wealth maximization as opposed to the short-term approach of profit maximization, EVA and FCF are promising indicators. Many past researches have shown that value-based performance indicators (especially EVA) are superior to traditional indicators like EPS, ROE, ROA, etc. Traditional indicators do not capture value creation and since they are accounting based, they can be manipulated by the managers. Therefore using them as firms’ performance measure is not in the best interest of the shareholders. The purpose of this study is to understand the various value-based performance measures and empirically verify the conceptual equivalence of free cash flow (FCF) and economic value added (EVA). For this, a sample of 30 firms listed in BSE SENSEX is taken and their FCF and EVA are calculated for the period of 5 years, from 2011 to 2015. The results of this calculation are analyzed using correlation and regression analysis. The descriptive analysis shows that there is a strong correlation between FCF and EVA. The regression analysis also shows that EVA and FCF are positively related which means that both EVA and FCF give similar results regarding firms’ performance. The discounting of appropriately defined cash flows (FCF) is conceptually equivalent to discounting economic profits (EVA) for performance and decision-making process. This study has empirically tested the conceptual equivalence of the two measures.