Academic journal article Academy of Accounting and Financial Studies Journal

The Research of Liquidity Risk Management Based on EVA Improvement

Academic journal article Academy of Accounting and Financial Studies Journal

The Research of Liquidity Risk Management Based on EVA Improvement

Article excerpt

INTRODUCTION

Many studies have shown Economic Value Added (EVA) to be an effective performance evaluation and management tool. Based on economic profit, the EVA indicator incorporates the cost of capital to accurately evaluate the wealth that operators create for shareholders, and it is an indicator of financial results that is widely-used around the world. In 2010, SASAC decided to carefully assess Economic Value Added among the central enterprises, to lead them to focus on value management, and to take capital value (EVA) maximization as the orientation, in order to set up a scientific and rational performance assessment system, to improve the ability of value creation and the quality of development, and to achieve sustainable development.

Many scholars are currently undertaking research on EVA. Foreign research has concentrated mainly on value relevance and performance evaluation. For example, some of this research has shown that EVA can reflect the true value of companies (Stewart, 1991) other research has found evidence that EVA is, in essence, excess and free cash flow generated by management to meet investors' expectations (Mohanty, 2003). Domestic research has indicated that EVA measures enterprises' performance by taking the shareholders' value as the focus (Wu Shangrong, Chen Yunsheng and Xu Wei, 2009) other scholars have have also conducted research on EVA performance evaluation systems (Gu Qi and Yu Changzhi, 2000) N (Chi Guohua and, Chi Xusheng, 2003).

Scholars have generated some controversy in the study of the effectiveness of EVA. Some studies have suggested that EVA has more advantages compared to traditional financial evaluation indices (Liu Li and Song Zhiyi, 1999) (Qu Shaofa and Wang Jianwei, 2003) (Wang Guoshun and Peng Hong, 2004) N (Huang Jun and, Li Fei, 2005) (Fu Jingli and Shi Yingjie, 2011). However, there are also studies that do not seem to agree with this view. Shen Weitao and Ye Xiaoming (2004) took China's Shanghai- and Shenzhen Stock Exchange-listed companies as subjects and studied EVA's effects on capital structure. The results indicate that EVA affects the capital structure of listed companies in China, but on the extent of weak. Li Yajing believes that although EVA has a positive correlation with market value, the information contained in the company's value is limited. Beyond the traditional accounting indicators, EVA does not have explanatory power beyond incremental information.

A large number of scholars have advanced proposals for improvements on the deficiencies of EVA as performance evaluation indicators. For example, some scholars have suggested that managers should assist in the implementation of EVA with other financial instruments, in order to broaden the application of EVA (Brewer PC and Gyan C, 1999) other scholars have pointed out that MVA and REVA are more advantageous than EVA in measuring the value of industry performance (Seoki Lee and Woo Gon Kim, 2009) Sheng Ju, in the EVA enterprise performance evaluation, stated that EVA lacks effective cash flow information, so it cannot reflect the profitability of cash inflow (Sheng Ju, 2009). While analyzing the financial indicators of performance evaluation which focus on EVA, Huang Yinan and Zhang Kui noted the way EVA establishes a connection with statements of cash flow. The specific method is to establish after-tax operating cash rate indicators (Huang Yinan and Zhang Kui Dong, 2009).

Liu Yunguo and Chen Guofei (2007) constructed a performance evaluation index system based on a combination of BSC and EVA, and make a comparative analysis of both system. As a result, they provide a new idea for similar state-owned enterprises to improve their level of performance evaluation. Gu Yinkuan and Zhang Hongxia (2004) described a method for company valuation: a model of EVA discounted valuation and its application in the valuation of listed companies in China. Based on the analysis of the above scholars, it can be interpreted that EVA, as the evaluation indicator that many scholars advance, neglects the information of cash flow, and that cash flow management is a key part of business management. …

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