Insights on Shareholder Value Addition from India’s Wealth Club: A Study of Selected Companies

Mandeep Kaur and Sweety Narang

The IUP Journal of Accounting Research and Audit Practices, 2009, vol. VIII, issue 3-4, 20-51

Abstract: ‘Managing for shareholder value’ and ‘shareholder value creation’ have become the widely accepted corporate objectives since the last decade. Most of the companies in India are still in the dark about what exactly they are supposed to do for managing shareholder value, though virtually they all say that they are doing it. For the real key to create wealth, a business enterprise has to earn economic returns to its owners for its economic survival. In a market-driven economy, there are a number of firms that create wealth, whereas others certainly destroy it. Economic Value Added (EVA), being a value-based measure, assists investors with wealth discovery and company-selection processes. In the present study, an attempt has been made to explain the application of EVA principles for the evaluation of companies and industries. It highlights and explains all the elements that find place in EVA computations like calculations of Return on Invested Capital (ROIC), Weighted Average Cost of Capital (WACC), cost of debt, cost of equity as per Capital Asset Pricing Model (CAPM), cost of preference capital, and finally of EVA. Taking a sample from India’s most valuable companies, the study shows that on an average, about 48% of the companies are actually wealth destroyers. It is quite shocking that of the 12 years study period, from 1996-2007, the sample registered negative EVA for eight years consecutively (1996-2002). Hence, the study raises a question as to whether this is a sufficient achievement for India’s so-called most valuable companies or not. Finally, the study provides the implications of the findings on corporate business strategies of Indian companies and advocates a few suggestions.

Date: 2009
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