Kennedy Prince Modugu and Emmanuel Eragbhe

Department of Accounting, University of Benin, Benin City




This paper examines the relationship between the market value added and internal performance characteristics in corporate Nigeria. The study is a cross-sectional examination of twenty-five firms quoted in the Nigeria Stock Exchange in the 2004 financial year. We employ a regression analysis and found that there is a strong positive relationship between MVA and EVA and some internal performance characteristics. It is consequently imperative for managers that those variables that influence shareholder value be stimulated in a positive way in order to maximize shareholder value.


Keywords: Economic value,internal performance, shareholders,




The primary objective and goal of a firm is to make profit. This singular objective propels the firm to maximize its shareholder equity and adopt policies that will increase its relevance within its industry and the economy at large.


Firms can be ranked according to how much value they have added or subtracted from their shareholders investments and so for a firm to sustain its credibility it must continue to add and increase value. This increase in value is seen externally as the worth or market value of the firm.


The increase in value of a firm over time has a strong influence on the share prices of the firm in the stock market. It also serves as a basis for determining the investment  decision to make by actual and potential investors. The effectiveness of the management of a firm in employing capital invested by shareholders is one strong factor amongst others that impacts on the value of firm. Thus the ability to create  value is the only real control that managers have in attracting investors. Value creation by a firm can be done by establishing differing performance metrics to track value creation for both insiders and outsiders alike.


This study seeks to determine through a cross sectional series spectrum the relationship between market value added and the internal performance characteristics and how this relationship affects the share price (market value) of a firm.


In order to achieve this goal, an empirical analysis was conducted. The research methodology, including the statistical analysis as well as boundaries of sample used were set out.


The significance of this study derives from the fact that financial statement is prone to window dressing in order to portray a more robust performance. Financial statement on which investment decisions are made only reflect ‘accounting profit”. This profit is subject to the manipulation of the management of the organization. This require a shift from the use of accounting profit to more realistic economic profit to determine whether the organization has increased in economic value. This increase which is a true picture of the organization will in turn influence the market worth of the organization and lead to a better return on investment.


Market value added  and economic value added.

Market value added is the difference between a company fair market value, as reflected primarily in its share prices and the economic book value of capital employed. The economic value added is considerably larger than accounting book value shown in the financial statement. Equity values in the books is made up of share capital, share premium, retained earnings and reserves, but also includes equity equivalent reserves as bad reserves, capitalization of R & D in order to show accurately the shareholders total cash investment in the company (Stewart 1990 : 180). Market value is the share market’s assessment, at any given time of how successfully the company has invested its capital in the past and how successfully investors expect the capital to be invested in the future. The ultimate goal of the firm which is wealth accretion is attained when market value added is maximized. Changes in MVA provide more useful information than total MVA. An increase in MVA indicates that the firm is  generating returns in excess of the cost of capital.


EVA can be viewed as an internal measure of performance which reflects the ability of the firm in adding value to shareholders. Thus it is related to the quantum of MVA and changes in MVA. EVA can also be seen as the economic earnings  that are capitalized by the market in arriving at the firm’s MVA. Thus we can conceive MVA as an external measure of the company’s efforts at generating value. The link between MVA and EVA can be mathematically expressed showing MVA at any point in time to be equal to the discounted present value of all the EVA the company expects to generate in future. Where a company returns is exactly equal to the cost of capital, EVA is zero naira, and it will at a market value equal to capital and hence MVA would be equal to zero. Stewart (1990 : 153) argues that EVA of a firm is like fuel that fires its  MVA. EVA is the internal measure which logically results in building a premium or discount into the market value of a company.



Data and empirical results

For the purpose of this study, we selected a sample of twenty-five firms across different sectors of the economy, listed in the Nigerian Stock Exchange in Lagos during the 2002 financial year. The information was obtained from records of the Nigerian Stock exchange data base and from financial statement of sample firms. All companies for which net earnings, book values of shareholders equity and prices at year end were available in the year under review were included in the sample. Firms in the sample were healthy firms non with a case of financial distress. All variables except market value are at fiscal year end. Stock prices will be the month-end average over twelve month period for 2002 financial year.


With the sample of companies selected, it will be necessary to calculate relevant variables that can be used as internal performance characteristics of a company. A correlation between these variables  and market value added (MVA) is calculated.


Data description

The data presented in appendix table 1 shows that the highest MVA for the sample firms was N125.7billion and the lowest was a negative MVA of N9million with average MVA standing at N99.22billion and a standard deviation of N25.2billion. EVA shows an average of 0.74billlion, with the highest and lowest EVA standing at N7.2billion and negative N15million. Return on Asset (ROA) records an average of 14.02%, with the highest and lowest ROA standing at 20.3% and 0.6% respectively. With respect to Return on Capital Employed (ROCE) the mean stands at 31.52% with the highest and lowest ROCE  standing at 109% and 0.8% respectively. Current ratio records 2.99 as its highest for the sample and the lowest current ratio is 0.167. The average current ratio is 1.35. Net Profit Margin (NPM) records  mean of 15.28% and the lowest and highest NPM at 3.52% and 97.2% respectively. The highest Earnings per Share (EPS) is 427kobo, the lowest EPS is 2kobo and mean EPS standing at 79kobo. Sales to capital ratio has an average of 150%, highest and lowest standing at 353% . Total Asset Turnover (TAT) has a highest figure of 176% and lowest figure of 7.2% for the sample in period under consideration. Mean TAT is 67%. Shareholders fund to capital employed shows an average in the period of 77%, with highest and lowest standing at 100% and 46.7% respectively.


Estimation of empirical results

For the empirical verification and analysis a single equation model, earlier specified is used here to capture the effect of and relationship of explanatory variables on Market Value Added (MVA).  The regression results are presented in the appendix iv. Appendix iv shows the estimation of the coefficient and the t-ratio on the data presented in appendix ii.


A close examination of the regression result shows that 96% of the variations in MVA is explained by the variations in the explanatory variable. The proportion of variations explained by R2 is highly complemented by the adjusted coefficient of multiple determination R-bar squared which after adjusting for degrees of freedom estimated the variation in the dependent variable MVA due from the explanatory variable at 95%. These results are satisfactory in terms of reliability. The F-value calculated exceed the critical F-table value at stringent 1% level validating a significant relationship between Market valued added and the regressors. The estimated MVA model equation has smaller variance of the error of prediction viewed in the light of small ratio of the SEE to the MDV. This implies that the model exhibits a high forecasting power, hence an overall goodness-of-fit. Also the DW statistics for all the years are not for far from 2.0 as to suggest a presence of first order serial correlation of the residual.


An  inspection of the statistical significance of the variables reveal that EVA and Current ratio are statistically significant as its observed t-value of 4.7265 and 2.2618 is greater than t-table value of 2.064 at 5% level. EPS is slightly insignificant as observed t-value of 1.9385 is marginally less than table value of 2.064.The other variables of Return on Asset (ROA), ROCE , Sales to Capital ratio, Total Asset Turnover (TAT) and Shareholders fund to capital ratio are insignificant as their observed t-values is less than 2.064.


There exist a positive relationship between MVA and EVA, ROCE, Current Ratio, EPS and Sales to Capital ratio. There is however a negative relationship between MVA and Return of Asset, Total Asset Turnover and Shareholders fund to capital ratio.



From the foregoing analysis we conclude that there is a strong relationship between MVA and EVA. There also exist a relationship between MVA and internal financial performance characteristics for measuring value. The fact of positive correlation with MVA indicates that shareholders and the market do regard them as indicators of value created by the company from its operating activities.


Literature suggest that there should be a high relationship between MVA and EVA. This study provides evidence in line with literature. The correlation between MVA and EVA was positive and highest of all internal performance characteristics. We conclude that EVA is a better performance characteristic, thus is it imperative for management to concentrate on increasing its EVA if it is to increase MVA for shareholders.



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