The Association between Economic Value Added, Market Value Added and Leverage
Read this article. You must be able to explain how market value added (MVA) is an element of shareholder value.
3. Research Methods
3.2 Variables Used in the Study and the Creation of Research Model
Table 1. Measurements of variables used in the analysis
Variables |
Measurement |
Dependent variableMarket Value Added (MVA) |
Market Capitalization - Shareholders’ Funds |
Independent variablesEconomic Value Added (EVA) Operational Leverage (OL) Financial Leverage (FL) Total Leverage (TL) |
NOPAT - Cost of Capital Employed Gross income/EBIT EBIT/PBT Financial Leverage x Operating Leverage |
MVA has been used as the dependent variable whereas EVA, OL, FL and TL have been used as independent variables. In order to avoid multicollinearity and autocorrelation issues, explanatory variables have been tested in four models rather than being tested in a single model. Based on the variables used in the study, the following regression models can be developed.
MVA = β0 + β1X1 + ε ⟶ Model I
MVA = β0 + β1X2 + ε ⟶ Model II
MVA = β0 + β1X3 + ε ⟶ Model III
MVA = β0 + β1X4 + ε ⟶ Model IV
Where: X1 = Economic Value Added; X2 = Operating Leverage; X3 = Financial Leverage; X4 = Total Leverage; MVA = Market Value Added.
β0 = Constant;
ε = Error term.