A Study On The Performance Evaluation Method Of The Abnormal-earnings-on-equity

According to the principal-agent theory, the separation of ownership and management has brought about information asymmetry of owners (clients) and operators (trustee) objectively. In order to urge operators to manage the enterprise in accordance with the owner's objectives, the valuation of the enterprise performance is necessary. Enterprises belong to enterprises' owners ultimately. As the owners of the capital, the ultimate purpose of going into business is to realize the maximization of enterprise value (equity value).So the valuation of the enterprise performance is the evaluation of the enterprise value essentially, and the purpose of valuating the enterprise is also to enhance the interests of the owners ultimately.Back in 1938, Preinreich had brought forward the thought that the enterprise value is decided by the abnormal income. In 1995, Ohlson established the abnormal earnings present value model that excels as a value model and confirms the relevance of abnormal earnings with enterprise value in theory strictly. It also approves that the value of an enterprise (equity value) is determined by its abnormal earnings. According to the abnormal earnings model, the changes of abnormal earnings will make a direct impact on the enterprise value.Traditional enterprise performance evaluation methods, such as the Do Pont Analysis Method, EVA, and the abnormal earnings indicators, are all based on discrete, static accounting information. They just provide information about enterprise performance on some special and cannot reflect the enterprise performance in time and dynamically. Such deficiencies can lead to inaccurate and incomprehensive judgment on the enterprise performance. For example, although the current periodic performance indicators may be outstanding, the whole enterprise performance may have already deteriorated. The trend of the enterprise achievement is not only reflects the operator's effort and owner's benefit but also has the important effect on achievement valuation. Based on the abnormal earnings present value, by introducing the concept of continuous-time variables and the speed, acceleration indicators reflecting the performance dynamically, we thereby established the performance evaluation method of the abnormal-earnings-on-equity and its indicator system. This new performance evaluation method can overcome all above defects of traditional methods and appraise enterprise achievement more entirely by valuating enteiprise achievement condition at any time and reflecting performance of enterprises and its change trend dynamically.This method can be considered as the improvement to tradition methods such as The Do Pont Analysis Method or EVA. Comparing to the Do Pont analysis method, the indicator of abnormal-earnings-on-equity is based on the abnormal earnings present value model and directly related with stock market. So it can reflect the enterprise market value directly and reflect truer enterprise value condition thereby. Besides, this new method adopts the continuous-time variables and thereby contains more information and therefore is able to reflect enterprise achievement more accurately. Comparing to the EVA's taking total assets as the basis of judging abnormal income, the performance evaluation method of the abnormal-earnings-on-equity takes net assets as the basis of judging abnormal earnings and makes the valuation of the added value to the shareholder clearer. On the other hand, the indicator of abnormal-earnings-on-equity is a relative index which is not affected by enterprise scale and can used directly in the achievement comparison between the enterprises with different scales.In the last part of this thesis, based of the stock market data of the two securities exchange in Shenzhen and Shanghai, we compared the new performance evaluation method with the Do Pont Analysis Method and EVA. Regressions of stock returns on the three method's core indices are carried out, and the three methods' explanation abilities to stock return are analyzed in the thesis. The results validates that the new method has the best explanation ability and proves that this new performance evaluation method is better than the traditional performance evaluation methods.