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 variable

Market Value Added (MVA)

Market Capitalization - Shareholders’ Funds
Independent variables

Economic 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.