EVA’ Value Relevance Of Listed Central Enterprises

How to assess corporate value has always been the important issue which the securities industry and the investors concern about. With the rapid development of Chinese capital market, the property rights transactions have flourished, and corporate value becomes the core issue that the management concerns about. Traditional financial indicators have occupied a dominant position in assessing corporate value for a long time, but along with the present intellectual economy, great changes have taken place in enterprises’ competitive environment, business risk, operational mode and so on. As the traditional evaluation methods have furthered away from the real value of enterprises, there is an urgent need for a more accurate, fair and scientific method to evaluate corporate value. Economic Value Added (for short EVA)was born to overcome the shortcomings of traditional financial indicators. It takes cost of equity capital into account, representing the added wealth for shareholders in a certain period of time, so a number of well-known foreign companies all favor it. According to the requirements of SASAC, all of the central enterprises will adopt the new system of performance evaluation since2010. Though lots of enterprises have verified the superiority of EVA, we still need to prove its applicability and superiority in Chinese capital market.Firstly, This paper reviewed the domestic and foreign literatures about EVA and EVA’value relevance, summarized related theories about EVA and corporate value. Then, the hypotheses of this paper were proposed based on the theoretical analysis. In order to validate the hypotheses, we selected datas of the listed central enterprises from2008to2010, and then we calculated EVA according to the requirements of SASAC. By using descriptive statistics, correlation coefficient analysis and multiple regression model, we tested the EVA’value relevance and compared with traditional financial indicators’value relevance. Subsequently, we took sensitive test to ensure the sensitivity of our conclusions. Finally, we put forward certain proposals, such as how to increase EVA of central enterprises and how to promote EVA in Chinese enterprises.This paper drawed the following conclusions:firstly, correlation between EVA and corporate value is significantly positive, so EVA can effectively guide the central enterprises’managers to make more objective and fair decisions to realize the maximization of corporate value. EVA is worth using in central enterprises. Secondly, EVA is superior to the traditional financial indicators in explaining corporate value.In the three indicators, the value relevance of EVA is much stronger than that of EPS, and the value relevance of ROE is the weakest. The traditional financial indicators ignore equity capital cost, however, EVA not only considers the equity capital cost, but also avoid accounting distortion. So EVA can really show how much value a company create and the rule issued by SASAC that EVA replaces ROE to occupy40points in the performance evaluation of the central enterprises is reasonable. Nevertheless, the empirical results also displayed that EVA cannot completely replace traditional financial indicators (EPS and ROE), and traditional financial indicators still have high value of information. In addition, considering non-mandatory disclosure, complex calculation and limitation of the information for EVA, the traditional financial indicators are still very simple and practical evaluation methods. Investors and corporate managers should continue to pay attention to traditional financial indicators and combine with EVA for comprehensive evaluation of corporate value.