Accounting and value based determinants of Malaysian companies’ stock performance

Abstract

Evaluating the performance of a company is vital to ensure optimal allocation of its limited resources. To achieve this objective, accounting performance measures have been developed. These measures are often criticized for not including the company’s capital cost and they could be manipulated. Based on literature reviewed, studies on the relationship between value-based measures and accounting measures with stock return are limited and there are contradictions among the existing results. Moreover, there are only a few studies on value-based measures in Asian countries, especially in Malaysia. EVA Momentum (EVAM) as the newest value based measure has not been empirically examined in public listed companies. Therefore, this research is the first Malaysian case in this area whereby an integrative model was developed to examine the relative information content (RIC) and incremental information content (IIC) between value based and accounting measures with stock return. The value based measures are economic value added (EVA), refined economic value added (REVA), EVAM, and market value added (MVA) whereas the accounting measures included net income (NI), net operational profit after tax (NOPAT), earnings per share (EPS), return on assets (ROA), return on equity (ROE), and return on sales (ROS). In addition, this study evaluated the RIC of the internal accounting and value based measures with MVA. Census method was applied to obtain data from non-financial public companies listed in the main market of Bursa Malaysia from the year 2002-2011. The historical financial data were analysed using E-Views 7 software. The RIC tests revealed that the value based measures including EVA, REVA, EVAM, and MVA, were not able to outperform accounting measures namely NI, NOPAT, EPS, ROA, ROE, and ROS, in their relationship with stock returns. Furthermore, the RIC test of internal measures and MVA indicated that internal value based measures involving EVA and REVA with the exception of EVAM outperformed accounting measures in their association with MVA, and their level was generally low. In addition, the IIC test illustrated that all value based measures jointly have IIC with stock return when compared to accounting measures. However, the accounting measures have more IIC with stock return when compared to value based measures. Finally, the IIC test showed that EVAM does not have IIC when compared to other value based measures, but NI has more IIC when compared to other accounting measures. The developed integrative model will serve as a guide on how to use value based measures involving EVA, REVA, and MVA with accounting measures for Malaysian companies in their annual reports.