Correlating internal and external performance yardsticks in the evaluation of corporate wealth creation

Abstract

It is widely accepted that the primary objective or goal of a firm is to maximise the value of its shareholders' equity. In management's attempts to increase shareholder value as measured by the market value of a company, they continuously influence, directly or indirectly, those variables that affect shareholder wealth. The goal of this study is to determine which internal performance measurement of a company correlate the best with its external performance measurement as represented by the market value (shareholder value creation) of trie corporation. In the literature part of this study, the emphasis fell not only on drawing a distinction between accounting-based and economic-based methods of determining shareholder value, but also on the fact that Economic value added (EVA) in particular, have distinct advantages in determining value created (or destroyed) by the management of a company. However, other internal ratios or yardsticks which might have an influence on the market value of a company are also identified and placed alongside EVA as variables that can correlate with the shareholder value created by the company. Whilst EVA and other variables or ratios are internal measures of shareholder value creation. Market Value Added (MVA) is the external method of determining shareholder's wealth. In order to achieve the goal of this study, an empirical analysis was conducted. The results of the empirical analyses were reported and compared with the theoretical principles. It was found that accounting-based performance yardsticks does not correlate as good with the market value of a company as economic-based methods such as EVA.