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EVA and shareholder value creation: an empirical study Wajeeh ElaliWestminster Business School

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EVA and Shareholder Value Creation: An Empirical Study

Wajeeh Elali

A thesis submitted in partial fulfilment of the of the University of Westminster requirements for the degreeof Doctor of Philosophy

September2007

DEDICATION

This thesisis dedicatedto my belovedfatherwho supported, inspired, and encouraged me to pursue my education to my

fullest abilities.He was always my greatfriend and mentor!

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ACKNOWLEDGEMENTS

First and foremost, I must acknowledge and thank my supervisory team to whom deeply indebted. I am particularly grateful to Dr. Kadom Shubber and Dr. Nic am Zafiris, not only for their guidance and expertise, but also for their assistance, facilitated my research work for this understanding, and accessibility, which greatly thesis. Their patience and trust in my being able to accomplish this task, despite my often daunting work load, were an encouraging and value added factor, to say the least. I truly benefited from them individually and enjoyed working with them over the last five years. I have been truly fortunate to have them as my supervisors as they are the kind of people that one would like to cultivate as friends as well as mentors. I wish also to extend my thanks and sincere appreciation to the Board of Examiners: Professor David Weir, Professor Ben Nowman, and Dr. Peter Urwin (Chairman). Their constructive critiques and insightful recommendationswere invaluable in completing this project. I would further like to acknowledge and express my thanks to Mike Fisher (The University Registrar), Patricia King-Edwards, Cristian Popescu, Eric Chang for their cooperation and professional assistance.Finally, I owe a special acknowledgement and thanks to my sister Dr. Hanan Ismail, my brother in-law Dr. Khalil Muhdi, and my niece Noor for making their home available for my stays in London. Their encouragementand hospitality gave me peace of mind during the various stagesof my thesis.

ABSTRACTIn recent years, a variant of residual income often called Economic Value Added (EVA)' or Economic Income (EI) has become a popular concern in academia and business communities. This study investigates the general hypothesis that EVA is more highly associated with firm values than are traditional shareholder wealth and

measures. Two commonly used value-based performance metrics namely, performance Total ShareholderReturn (TSR) and Tobin's Q are also consideredto highlight the valueEVA vis-a-vis these measuresin predicting shareholderwealth. relevanceof Using a sample of panel data of around 12,000 firm-year observations taken from the Stem Stewart 1000 EVA/MVA databaseand the DATASTREAM file over the period 1991-2002, this study finds compelling evidence that shareholder value is a function of EVA. This study also provides evidence consistent with the notion that EVA outperforms traditional performance measures in explaining shareholder wealth. Valueother tests reveal EVA to be more highly associatedwith shareholder wealth than relevance TSR and Tobin's Q. The incremental tests also suggest that EVA possesses the largest (or information usefulness) over TSR and Tobin's Q. These results explanatory power the claims made by EVA proponents and further support the conclusively support the EVA metric for internal and external performance. potential usefulnessof

' EconomicValue Added or EVA is a relatively new measureof corporateperformancedevelopedand Stern Stewartand Co. (hereafter in trademarked the late 1980sby the US-basedbusiness consultants to as Stem Stewart). referred

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TABLE OF CONTENTSDEDICATION ACKNOWLEDGEMENTS ABSTRACT LIST OF FIGURES LIST OF TABLES CHAPTER 1: INTRODUCTION 1.1 Objective of the Study 1.2 ResearchQuestions and Hypotheses 1.3 Outline of Thesis 1.4 Concluding Remarks CHAPTER 2: BACKGROUND AND LITERATURE REVIEW 2.1 Introduction 2.2 ShareholderValue Approach 2.3 Value-based Metrics 2.3.1 Economic Value Added (EVA) 2.3.2 Market Value Added (MVA) 2.3.3 Tobin's Q 2.3.4 Total ShareholderReturn JSR) 2.3.5 Cash Flow Return on Investment (CFROI) 2.3.6 The Balanced Scorecard(BSC) 2.4 The Association between EVA & ShareholderValue 2.5 Concluding Remarks CHAPTER 3: RESEARCH ISSUES and HYPOTHESES 3.1 Introduction 3.2 ResearchIssues 3.3 ResearchHypotheses 3.3.1 Hypothesis One 63 64 65 65 7 7 19 20 35 39 43 45 50 53 61 iv vii viii I 3 4 5 5

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3.3.2 Hypothesis Two 3.3.3 Hypothesis Three 3.4 Concluding Remarks

66 67 68

CHAPTER 4: RESEARCH DESIGN & METHODOLOGY 4.1 Introduction 4.2 Data Sources and Statistical Techniques 4.3 Model Specification 4.4 ResearchVariables 4.4.1 Dependent Variable 4.4.2 Independent Variables 4.5 Concluding Remarks CHAPTER 5: DATA ANALYSIS AND PRESENTATION OF RESULTS 5.1 Introduction 5.2 Descriptive Statistics 5.3 Test of Hypothesis 5.3.1 Hypothesis One 5.3.2 Hypothesis Two 5.3.3 Hypothesis Three 5.4 Concluding Remarks 80 81 82 82 85 91 99 69 69 72 74 74 75 79

CHAPTER 6: CONCLUSIONS, LIMITATIONS, AND FUTURE RESEARCH 101

REFFERENCES APPENDICES Appendix A: Figures Appendix B: Tables Appendix C: The 2002 Stem Stewart Performance 1000

107 116 117 121 165

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LIST OF FIGURES

Figure One: Figure Two:

The Shareholder Value Analysis Network A Typical Financial Management System (Fuzzy Finance)

117 118 119 120

Figure Three: EVA: A Simplified and FocusedFinancial Management System Figure Four: Balanced Scorecard(Casual Chain)

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LIST OF TABLES

Table 2.1 Table 4.1 Table 4.2 Table 5.1

How Performance Measures"Explain" Changesin MVA Calculation of NOPAT from Financial StatementData Calculation of Capital Using Accounting Financial Statements Descriptive Statistics of Variables Employed in the RegressionModels

121 122 123

124 125 126 128 130 133 136 139 140 143 148 153 163 164

Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6 Table 5.7 Table 5.8 Table 5.9 Table 5.10 Table 5.11 Table 5.12 Table 5.13 Table 5.14

Correlation between Variables Hypothesis (1): Univariate RegressionResults Hypothesis (2): Multivariate RegressionResults Fixed vs. Random Effects (Equation 5.3) Statistical Results of Step One of Hypothesis (2) Testing Statistical Results of Step Two of Hypothesis (2) Testing Hypothesis (2): Relative & Incremental Value-relevance Tests Hypothesis (3): Multivariate RegressionResults Fixed vs. Random Effects (Equation 5.13) Statistical Results of Step One of Hypothesis (3) Testing Statistical Results of Step Two of Hypothesis (3) Testing Hypothesis (3): Relative Value-RelevanceTest Hypothesis (3): Incremental Value-RelevanceTest

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Chapter 1 INTRODUCTIONThe link between performance measures and shareholder value creation has

interest.Academicresearchers, becomean issueof considerable academic practitioner andbusiness analysts have engaged in a rather heated debate in the corporate executives, and last decade or so as to whether the new value-based performance metrics have a higher their returns than do other traditional accounting-based correlation with stock values and 2 Economic Value Added (or EVA), the income remaining after all residual measures. costs, including the opportunity cost of the equity capital employed, is among the few that have been widely adopted and are claimed to approximate performance metrics In effect, EVA is promoted by its proponents as being superior to shareholder returns. traditional and non-traditional performance metrics as a determinant and predictor of other (Stewart, 1991; Ehrbar, 1998). corporate successand value creation Nevertheless, despite the growing amount of literature that has attempted to the claims made about EVA's superiority; little empirical researchhas so far been evaluate done to support the above assertions (e.g., Ittner & Larcker, 1998; Lehn and Makhija, 1997; Lovata and Costigan, 2002; Yook, 1999; Feltham et al., 2004). Moreover, the limited studies that have appeared in the literature have produced somewhat conflicting For instance, Biddle et al. (1997); Chen and Dodd (1997); Fernandez(2002); conclusions.

2 See, for example, Ittner and Larcker (1998 and 2001); Black et al. (2001); Arnold and Davies (2000); Garvey and Milbourn (2000); Myers (1996); Chen and Dodd (1997); Biddle et al. (1997); Worthington and West (2004); Erasmusand Lambrechts(2006); Rajan (2000); Feltham et al. (2004); Fergusonet al. (2005); Fabozzi and Grant (2000). and

Paulo (2003); Palliam (2006); and Stark and Thomas (1998) have mostly not been

supportive of these claims. On the other hand, Grant (1996,2003); Lehn and Makhija(1996,1997); Zafiris and Bayldon (1999); Young and O'Byrne (2001); Worthington and West (2004); Tully (1993,1998); Ferguson et al. (2005); Erasmus and Lambrechts (2006); and Feltharn et al. (2004) have made contributions that favour EVA on theoretical and/or empirical grounds. The inconclusive and mixed results of these studies raise an important question. Is EVA really superior to other alternative performance measures or is it merely a fad by a management consultancy firm? This conflicting evidence thus necessitates promoted the conducting of further studies that may provide better insight and understanding into this complex, yet crucial relationship between shareholder wealth creation and EVA. To further this idea, Lovata and Costigan (2002, p.226) stated, "Economic Value Added is a that requires much additional research to support or contest the claims of its concept developers. Likewise, Feltham et al. (2004, p. 83) suggests that the debate should be " EVA has greater relevancethan other performance measures. reopenedregarding whether On the other hand, there has been an emphasis in previous empirical work in this limited set of panel data. For example, area on either a cross-section of companiesor on a Bao and Bao (1998) only employed a cross-sectionof 166 firms over the period of 199293; whereas, Grant (2003) focused on only 50 of the largest U. S. wealth

2000. Clearly, an examination of extended "panel data" creators/destroyers at year-end the usefulness of EVA as an would certainly permit greater empirical certainty on

2

advanced measure of corporate performance and value creation. Thus, the scope of this study must out of necessity go further. This study, therefore, explores the suitability of using EVA as a measure of corporate success as well as providing additional empirical evidence on the use of EVA. Specifically, the statistical association between EVA and the creation of shareholders has been empirically examined and highlighted. The efficiency of two alternative wealth value-basedperformance measures-namely, Total ShareholderReturn (TSR) and Tobin's was also considered vis-a-vis EVA to assertor refute its superiority. In this chapter, the overall objectives of the thesis are highlighted, and are followed by a brief discussion of the three research questions that form the foundation of this study and so comprise the basis for its hypotheses.

1.1 Objectives of the StudyThe primary objective of this thesis is to empirically test the assertion that EVA is highly associatedwith Market Value Added (or MVA). Market Value Added is defined as the difference between the market value of the firm (including equity and debt) and the total capital invested in the firrn (Young and O'Byrne, 2001, p.29). It is a measure of is considered to be the best indicator of shareholder value external performance, which The study does not seek, though, to fully explain the determinants of MVA, but creation. to show how well EVA acts as a genuine explanatory variable for MVA, in order to only justify its usefulness for performance measurement,shareholder value creation, executive financial reporting. compensation,and

3

Thus, the objectives of this study are three-fold. First, to ascertain whether there is a significant statistical association between EVA and shareholder wealth. Second, to examine which value-based performance metric (EVA, TSR, or Tobin's Q) has a greater association with market value added (MVA). Finally, to attempt to uncover whether the components unique to EVA-namely, net operating profit after tax (NOPAT), return on

invested capital (ROIC), profitability index (PI), Capital Growth (CG), cost of capital (WACC), and total invested capital (TIC) -- help in explaining contemporaneousMVA beyond that explained by traditional value-basedperformance measures.

1.2 Research Questions and HypothesesThe hypothesesto be tested are derived from the notion that EVA is generally more highly associated with shareholder returns and firm value than are other alternative performance measures.Thus, this study posesthe following questions: e Does a statistical relationship between EVA and shareholderwealth in the sense of contemporaneousMarket Value Added (MVA) exist, and if it does, how much of the variation (i. e., change) of the shareholder value be explained by EVA? can * Does EVA dominate other commonly-used value-based measures in explaining MVA? 9 Do components unique to EVA help to explain contemporaneousMVA beyond that explained by traditional value-basedperformance measures?

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These three questions form the foundation of this study and consequently comprise the basis for its hypotheses.While the first question explores the direction and the strength of the relationship between EVA and MVA; the second and third one's investigate the EVA efficiency of vis-a-vis other alternative performance metrics in predicting

shareholder value.

1.3 Outline of ThesisTo addressthese researchquestions,this study is organized as follows: In Chapter 2, the relevant literature on value-basedperformance metrics and shareholder is reviewed and discussed. Chapter 3 presents the empirical research value creation hypotheses.Chapter 4 describes the population and data sourcesas well as presenting the design and methodologies for testing the hypotheses.In Chapter 5, the results of a research investigation are presentedfor each hypothesis and discussedin comprehensive statistical detail. Finally, chapter 6 summarizesthe statistical results and discussesadditional aspects this study for future research. of

1.4 Concluding RemarksOver the last two decadesor so, there has been a growing concern among business and professional managers that traditional accounting measuresof analysts, academics, longer appropriate for the purpose of strategic decisions and control. In performance are no the ongoing search for more adequate performance measures that show some link to

5

shareholder value, a number of alternativevalue-based metrics have been developedandby their respective advocates. The EVA, which is a residual income metric that promoted subtracts the cost of capital from the operating profits generatedin the business,seemsto have emerged as a real improvement over the traditional accounting measures.This study the assertion that EVA is a superior measureof performance and value creation. explores In the following chapters, this issue will be thoroughly investigated and empirically

examined.

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Chapter 2 BACKGROUND2.1 IntroductionThe association between alternative performance measures and firm value has deal of academic interest for a long period of time. Several explanations attracted a great and predictions regarding this relationship have been raised in both the economic and literature. The central topic addressedin this chapter involves how the value accounting creation process of the firm. is reflected in alternative value-based performance metrics. The purpose of this chapter is to provide the basic theoretical and empirical foundation for the thesis as well as give a detailed review of six of the most widely used and discussed in the business world and academic literature that is, value-basedperformance metrics Economic Value Added (EVA); Market Value Added (MVA); Cash Flow Return on Investment (CFROI); Market-to-Book Value Ratio (MBV) better known as Tobin's Total Shareholder Return (TSR); and the Balanced Scorecard (BSC). The specific between these performance metrics and shareholder value creation will also relationships be discussedand highlighted. Concluding remarks are provided at the end of the chapter.

AND LITERATURE

REVIEW

2.2 Shareholder Value ApproachOver the last decade or so and in particular globalization, de-regulation, trade liberalization, technological changes,transparencyor fuller disclosure of activities, and the information revolution including the internet, as well as the increasing sophistication of the

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financial markets have become the dominant forces behind the transformation ofcorporations and the climate in which they operate. Companies across the globe are now under unprecedentedpressureto adapt to this new climate and to perform consistently well in all markets, in which they compete the product market, the labour market, and -namely, the capital market. Otherwise, they would be out of business. What will corporate successlook like in the decadesahead?Certainly, the rules of the game have changed. Corporations are now finding that making good products and trying desperately to satisfy customers are still necessary,but are no longer sufficient. Nor is it enough to focus on traditional earning figures alone. The key to successin today's business environment is the simultaneous delivery of a superior return to investors, focusing on core businesses,removing constraints, doing proactively managing risks, businessdifferently, as well as maintaining sustainablegrowth rates. A team of experts at Price Waterhouse Coopers aptly declared that, even though, these challenges may look new; essentially, they are the same old ones in a different guise (Black et al., 2001, p.24). The three aspects of market activity, that is risk, growth, and to be crucial. The fact that cash is king and investors require an adequate return, continue for the risks they bear, has not changed. What has changed, though, is the compensation focus. Despite the fact that the capitalist system has always seemed to be structured to the interest of the owners of the equity (i. e., the shareholders); it is only now, with serve increased globalization and a sophistication of financial markets, that shareholders' interests have become the focal point for all critical corporate activities. Successful

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companies of the future will be those that make managing and creating shareholdervalue (SHV) the central goal of their corporate and businessstrategies. There is no lack of evidence that focusing on optimizing shareholder value is the best way to ensure a firm's long-ten-n prosperity. McTaggart et al. (1994, p. 10), for argued that "maximizing shareholder value is superior to any other governing example, becauseit will lead managersto make the decisions most objective a company might adopt likely to increase the company's competitive, organizational, and financial strength over time". However, corporate managersmay not always engagein transactionsthat are solely in the best interest of shareholders.Studies show that those managerswho fail to deliver to shareholders in the race for global capital resources,will find their companiesat a value disadvantage. As Young and O'Byrne (200 1, p. 13) aptly put it, "They must competitive learn to navigate the rough seas of competitive capital markets, or they will find themselvesreplaced by managerswho can". Rappaport (1998) also points out: "The threat of takeover is an essential means of constraining corporate managers who might choose to pursue personal goals at the expense of Any significant exploitation of shareholders should be shareholders. in a lower stock price. This lower price, relative to what it might reflected be with more efficient management, offers an attractive takeover for another company, which in many cases will replace opportunity " incumbent management. (p.4) Likewise, Copeland et al. (1996) reported that maximizing shareholder value be closely linked with a higher standard of living, greater overall productivity appearsto better functioning equity market. and competitiveness, and a "If countries whose economic systems are not based on maximizing investors lower return on capital than those who do, shareholder value give

9

they will slowly be starved for capital, as capital markets continue to falling farther and farther behind in global competition. - (p.4) globalize, They go on: "If suppliers of capital do not receive a fair return to compensatethem for the risk they are taking, they will move their capital across national borders in search of better returns. If they are prohibited by law from moving their they will consume more and invest less. Either way, nations who capital, don't provide global investors with adequatereturns on invested capital are doomed to fall farther behind in the race for global competitiveness and decreasingstandardof living. " (p.27) suffer a stagnating or

Empirical studies and business reports show that there has been widespread interest in SHV-based systems and performance measurement approaches worldwide (Ittner & Larcker, 1998; Black et al., 2001). A good number of relatively high-profile have already taken steps towards installing and implementing a SHV corporations in the USA, Europe, and Japan, but also in many other measurementsystem -- not only that of Singapore, South Korea, India, China, Brazil, and emerging economies such as Hungary. To quote Black et al. (2001, p.255) over 5% of the FT 500 companies and about 8% of the FT Global 500 have now installed a SHV/performance measurement system in many cases,the large corporations have beenthe ones to take the lead. and, The growing predominance of the SHV culture is largely a consequenceof several developments,which, among others, major 3 include the following:

1) The globalization and deregulation of financial markets; 2) New advancesin information technology including the internet; 3) Generational changesin attitudes toward savings and investment;details, seefor example,Shiller (2000); Soros(2000); and Young and O'Byrne (2001). For more

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4) The expansionof institutional investment; and 5) 'Irrational exuberance94 .

The global economy is increasingly characterizedby a freer trade in factors as well in goods and services. Among other things, this means that investors now have the as their money much faster and more easily around the world as they possibility of moving in search of the greatest return. As a result, interest rates, exchange rates, are constantly in various countries are invariably interrelated, says American billionaire and stock prices financial mogul, George Soros. He goes further to assertthat global financial markets and tremendous amount of influence on economic conditions throughout the world. In exert a today's business environment, financial capital enjoys a privileged position as it is more than other factors of production (Soros, 2000). mobile Moreover, interest in all kinds of stock: in high tech companies, in new and oldfirms, as well as in general investing, has grown in unprecedentedways in recent economy history. This culminates in a colossal worldwide explosion of mutual funds, unit trusts, and forms of institutional investment like hedge funds. According to some observers, novel have a financial stake in companies, especially, through mutual many more people can funds or pension funds. What is of particular importance to corporate managers,though, is funds are controlled by professional managerswho care only about performance that these delivering the highest possible returns to the people who hired them (Young and and about O'Byme, 2001, p-7).4 The term "irrational exuberance" was coined by Alan Greenspan,chairman of the US Federal Reserve describe the dot.com boom. It was also the title of a book by ProfessorRobert Shiller from Yale Board, to the boom. In his book, Shiller (2000) arguedthat, as the bull market developed,it University that examined the ftiture and stimulateddemandfor shares. optimism about generated

On the other hand, one could arguethat corporatemanagers often get confused;ifnot trapped, when they face multiple objectives or when they are held accountableto more than one party/objective. To avoid such confusion or conflicting signals, they have to focus on only one prime overriding objective. This simplifies matters and makes a great deal of difference. As Brittan (1996) pointed out, "People function best if they have specific for which they are held accountable by means which are transparent, responsibilities verifiable and respect the realities of human nature." The objective of maximizing shareholder value seems to be absolutely sound as it not only allows for just such a but it also provides the transparent and verifiable means necessary to responsibility, measure it. In short, one can conclude that it has all the characteristics of the "right"

objective.The theories underlying SHV have a long history stretching back to the intellectual work of Markovitz (1952), Modigliani and Miller (196 1), Lintner (1965), Sharpe (1964), Fama (1965) to name just a few. According to Black et al. (2001, p.21), the SHV and discipline started to take on a life of its own as a result of work done on the Capital Asset Pricing Model (CAPM). The fundamental idea behind this model is that the expected is linearly related to its systematic or market risk, as measuredby beta. return on equity The higher the beta, the greater the expectedreturn. Black et al. further point out that: "the key insight of the CAPM model - one that is central to the SHV view of the is that there is a risk-weighted discount factor which allows [one] to assess world the value today of tomorrow's developments, profits and cash flows. This discount5It is important to note that, as great a developmentas CAPM was, it is not without seriouscriticism. The trying to empirically validate it is so large that we will not attemptto cataloguethem all. numberof papers For more detail, seefor example,Blum and Friend (1973); Famaand French(1992,2004); and Bornholt (2007).5

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is derived from observations of capital markets, and defines rate what the opportunity cost of equity to investor in the market is. It stateswhat the company has to earn in order to justify the use of the capital resourcestied in the up business. 22) "(p.

The SHV approach has gained widespread acceptance since the publication of 'Creating Shareholder Valueby Alfred Rappaport in 1986.6This text provided a new and in-depth assessmentof the rationale for the SHV approach as well as the tools neededto implement it as a standard for businessperformance.According to Rappaport (1998, p.32), the total value of an entity such as a firm or businessunit is equal to the sum of the values its equity and its debt. This economic or strategic value of the business is termed of 44 corporate value" and the value of the equity portion is termed "shareholder value". The the firm can then be written as: value of

Corporate Value = Shareholder Value+ Debt Value

(2.1)

Thus, in order to determine shareholdervalue, one must first determine the value of the total firm or business unit, that is, corporate value. To value a company, several writers firms (e.g., Damodaran, 2006; Copeland, 1996; Titman and and management consulting Martin, 2008; McKinsey & Company, 2005), have proposed analyzing the company's historical performance; defining and projecting free cash flow over the short, medium and long run; and discounting the projected free cash flows at an appropriate cost of capital. Using the free cash flow (FCF) approach, the total businessvalue is determined by the so-

A revised and updatedversion of the original edition waspublished in 1998.

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called "Free Cash Flows to the Firm" (FCFF), discounted at the "Weighted Average Cost of Capital" (WACC). Since the expected FCFF cannot be estimated forever, it is suggested

that it be estimatedduring the "forecast period" of five or ten years and that a "residual(or terminal value) be estimated for the period beyond the forecast period. The value" present value of the FCFF over the forecast period plus the present value of the residual would result in the value of the businessas a whole. In general terms, the value of a value firm that expects to sustain extraordinary growth for N years can be written as:

Corporate Value

]+ [Terminal ValueN Expected Cash Flow to the Firmt C)N (I + WAC (I + WACC)t t=1

(2.2)

For a more precise estimate of corporate value, a third component to be added to the corporate value model; that is, the current value of marketable securities and other noninvestments that can be converted to cash, which are not essential operating assetssuch as the business (Rappaport,1998, p.33). Thus, the value of a firm can be written to operating as the sum of three components:

CorporateValue = Presentvalue of cashflow from operationsduring the forecast period Residual value (2.3) Marketable securitiesand other nonoperatingassets

After the value of the firm as a whole has been determined, the part of the value is calculated as follows: available to the shareholders

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ShareholderValue= Corporate Value- Debt Value orN

SH VO

FCFF, (I+ WACC,)'

+

[WACCI FCFF N+l-gN_--

oo CF, (I+ RFI, 1=1

(2.4)

where SHVo FCFFt N9N

WACCtCFFI, t

RFI,

t

= shareholder value in year 0 (current year) free cash flows to the firm in year t = expected = number of years of high or extraordinary growth beyond year N = stable growth = weighted average cost of capital in year t flow of a fixed income security (debt obligations and other = expected cash claims such as preferred stock in year t to be used to discount the cash flows in year t = required rate of return

The idea of measuring shareholdervalue by comparing cash flows generatedby the business against the cost of capital used in generating those flows is to provide a clear degradation over time within each business unit. understanding of value creation or Rappaport (1998, pp.55-57) indicated that shareholder value is driven by seven factors: income tax rate, working capital investment, fixed sales growth, operating profit margin, investment, weighted averagecost of capital, and value growth duration. The theory capital is that improvement in these value drivers leads directly to an increasein shareholdervalue as shown in Figure 1. In the 1990s, interest in the SHV approach received a further boost first by the 'Valuation. - Measuring and Managing the Value of Companies' by Tom publication of

15

Copeland, Tim Koller, and Jack Murrin from the McKinsey GroUP7 and second by the ,

publication of 'The Quest for

8 Value' by G. Bennett Stewart. The Copeland text

demonstratesin great detail how businessescreate value and argues that companiesthrive when they create real economic value for their shareholders.This text further assertsthat by investing capital at rates of return that exceed their cost of companies create value capital (WACC). Copeland et al. (1996) put forward the idea that the application of SHV to companies is both feasible and highly desirable. They also debate whether principles such an approach can yield substantial benefits not only to shareholders,but also to other 'Stakeholders' in a company.

On the other hand, Stewart's book (The Questfor Value) introducesthe idea ofeconomic value added (EVA) -- a revolutionary new concept that has been developed by the US consultants Stem Stewart & Company to identify and track sources of value that are not explained by traditional accounting and financial measures.While the creation be creative, EVA is simply a variant of the well-known concept called acronym may 9 It is income. the adjusted after-tax operating income minus a capital residual simply Although the term EVA appearedin financial literature as early as 1989 (Finegan, charge. 1989), it did not attract that much attention until an article appearedin Fortune magazine September20,1993.10 Nevertheless, Stewart's text was instrumental in promoting and on advancing this new/old value-basedmetric.

7 Copelandet al. (1996). 8 Stewart(199 1). 9 It is also called economic profit (EP). See,for example,Arnold (2005, p. 828). 10 Tully (1993).

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It goeswithout saying that all thesebooks have contributedin one way or anotherto the promotion as well as to the popularizing of the SHV discipline. By so doing, companies have achieved a real and sustainable increase in their share value. The TM FinanceAdviseorTM 2.0, CAPI emergence of recent software (e.g., EVManager , Balanced Scorecard EVA Model, ART-EVATm) has allowed SHV to continue to advance as more and more companies, which previously had neither considered it nor felt competent or comfortable applying it, are now beginning to implement it. It has long been argued that corporations should be run in order to maximise shareholder wealth. Black et al. (2001, p.257) stated that "The emergence of the SHV concept reinforces the messagethat companies have to improve their returns on invested capital as well as reduce their cost of capital." Friedman (1970), for example, affirmed this by suggesting that the firm's sole purpose should be to operate for shareholders.However, managing a company for value requires delivering a maximum return to the equity holders while balancing the interests of the other important constituents, including customers, employees, government, and suppliers. The proponents of the shareholderwealth approach frequently argue that maximizing shareholder value leads to the maximization of all The argument here is that by adopting the measures necessary to stakeholder claims. a company can advance the interest of other stakeholders as maximize corporate value, its shareholders. This also adds value to the society in which it operates. In the well as literature, this phenomenon has been linked to a win-win situation (Cooper, 2000, p.81). When corporations correctly implement this strategy, not only do the shareholdersbenefit,

17

but everybody else does as well. The following quotation sums it up (Copeland et al., 1996): "Empirical evidence indicates that increasing shareholder value does not the long-run interests of other stakeholders. Winning conflict with companies seem to create relatively greater value for all stakeholders: customers, labor, the government (via taxes paid), and suppliers of capital. Yet, there are additional reasons-more conceptual in nature, but equally compelling-to adopt a system that emphasizes shareholder value. First, is the best metric for performance that we know. Second,shareholders value are the only stakeholders of a corporation who simultaneously maximize in seeking to maximize their own. And finally, companies everyone's claim that do not perform will find that capital flows toward their "(p. 22) competitors. Similarly, in 1996, the CEO of Coca-Cola, the late Roberto C. Goizueta, argued the case for putting shareholders(or owners) interests first: "Saying that we work for our share owners may sound simplistic - but we frequently see companies that have forgotten the reason they exist. They try in vain to be all things to all people and serve many mastersin may even different ways. In any event, they miss their primary calling, which is many to stick to the business of creating value for their owners... [While] a healthy company can have a positive and seemingly infinite impact on is a drag on the social order of things. It cannot others, a sick company jobs, much less widen the opportunities available to its employees.It sustain It cannot give to philanthropic causes. cannot serve customers. ... The real and lasting benefits we create don't come because we do good deeds, but because we do good work - work focused on our mission of I time for the people who own the company."' creating value over finally be concluded that the idea of a firm's operating to maximize It can is not a new one, but this doctrine is only now gaining widespread shareholder value Rappaport (1998, pp. 1-3) concedes that this is now being embraced as the acceptance." Remarksdelivered to Executives' Club of Chicago,quotedin Coca-ColaCompany annualreport, 1996.

18

"politically correct" stance by corporate board membersand top managementin the United Kingdom, continental Europe, Australia, and even in Japan.However, in the United States, it has been a long established tradition. Rappoport also assertedthat, as is the case with other good ideas, shareholder value has moved from being ignored to being rejected and then to becoming self-evident. Furthermore, he predicts that over the next ten years, shareholdervalue will more than likely become the global standard for measuring business performance.

2.3 VALUE-BASED

METRICS

Recent surveys have indicted the increasing importance of value-based metrics as benchmarks for assessingand managing corporate performance (see, for example, Ittner Larcker, 1998; Black et al., 2001). In the past 10 to 15 years, many consulting firms and have been caught up in a fierce competition to promote their service regarding value-based They desperately try to capture the hearts, minds, and dollars of performance measures. In an interesting article in the CFO magazine, Myers (1996) has corporate executives. dubbed this engagement as the "Metric Wars". Measures such as Economic Value Added (EVA), Market Value Added (MVA), ShareholderValue Added (SVA), Economic Profit (EP), Cash Flow Return on Investment (CFROI), Tobin's Q or Market to Book Value, Total Shareholder Return (TSR), and other value-basedmetrics are virtually all "rooted in the concept that companies should not look at reported earnings, which are subject to distortions, but at how a company's returns exceed its cost of capital"(Myers, accounting 1996, p.42). Money managers, business analysts, corporate executives, consultants, and

19

academicshave increasingly utilized these metrics as they provide unique advantagesover traditional accounting-based metrics such as EPS, ROA, ROE, or balance sheet ratios in reflecting value creation. In this section, six of the more popular value-basedperformance

discussed. metricsarepresented and

2.3.1 Economic Value Added (EVA) More recently, Economic Value Added (or EVA) has been attracting considerable in the financial press and corporate world. Biddle et al. (1997, p.302), for attention instance,pointed out that citations of EVA in the businesspress have grown exponentially, from I in 1989 to 294 in 1996. Fortune magazine in its breaking article (Tully, rising 1993), branded EVA as "the real key to creating wealth". In August 1997, the Economist interesting article about EVA, crowning it as "a star to sail by". As a also published an new management tool to gauge corporate performance and value creation, it has been broadly accepted by a wide range of senior executives, financial analysts, and institutional investors. Moreover, an AICPA workshop on the future of financial management(April 1995) predicted that EVA would replace EPS (earnings per share) in The Wall Street Journal's regular stock and earnings report (Zarowin, 1995, p.48). Today, in North America and around the world, a sizeable number of companies have adopted EVA as their key performance metric, even linking it to the fortunes of their The growing popularity of EVA has also been reflected on the capital and executives. increasing number of security analysts at brokerage housesare money markets, where an EVA to pinpoint winners and losers (Topkis, 1996). Furthermore, as companies and using

20

for their officers are increasingly being held accountable shareholder value, EVA, which forces managersto think and behave like shareholders, becoming more and more a is fundamentalpart of both running andjudging a business.The concept of EVA is neither new nor complicated. It dates back to Alfred Marshall, a famous English economist who, over 100 years ago, wrote that a firm, in order to create real earnings, must generatea profit in excessof its capital cost (Marshall, 1890). What Marshall was actually saying is quite simple. A firm can only createtrue value for its if and only if it is capableof making sound investment, financial, and shareholders/owners, decisions, which yield a return in excess of its cost of capital. If that is not the operating then there is no real profit or true value added to the businessand, actually, from the case; the company would thus be operating at a loss. This valuable shareholders' viewpoint, insight of Marshall's has been a good management practice for business growth and the beginning of last century. survival since It is interesting, though, to note that, the managementguru, Peter Drucker, in the fifties as well as in a more recent 1995 Harvard Business Review article, reiterated this idea by saying that "Until a business returns a profit that is greater than its cost of capital, it operatesat loss. Never mind it pays taxes as if it had a genuine profit. The enterprise still a less to the economy than it devours in resources. It does not cover its full returns the cost of capital. Until then, it does not costs unless the reported profit exceeds it destroys it. " (Drucker, 1995, p. 59). create wealth; In the twentieth century, the concept of EVA was the object of extensive academic debate in the accounting and finance literature and it has been operationalized under

21

labels including Residual Income (RI). 12 In the past several years, a US-based various business consulting firm Stem Stewart & Company (hereafter referred to as Stem Stewart) has been promoting a variant of RI under the acronym of Economic Value Added or EVA for measuring corporate performance and value creation.13This new/old measure, as a tool though, is similar to residual income (RI), but distinguishes itself by a series of to eliminate potential distortions of accrual accounting as well as the inclusion adjustments 14 both debt and equity sources of capital in the calculation of cost of capital. of According to Stem Stewart, EVA is defined as the difference between a firm's net income after taxes (NOPAT) and an appropriate charge for the opportunity cost operating invested in that firm (Stewart, 1991, pp. 136-138). As such, EVA is a measure of all capital to produce an economic profit, that is, a return in excessof a firm's of a company's ability In equation form, EVA for a given year, t, can be expressedas follows: cost of capital.

[WACC, x TIC, ]= (ROIC, WACC, ) x TIC, E VAI = NOPA T, -, -,

(2.5)

NOPATt is the net operating profit after taxes, but before financing costs in year t; where TICt-I is the economic book value of the total capital invested in the company, at the12 Residualincome (RI) is generally defined as what is left from accountingearningsafter deductinga charge for investedcapital to reflect a minimum required rate of return on the investedcapital. Book value is usedas investedcapital. Thus, a firm's RI for any period is calculatedas a product of the the measureof betweenthe firm's return-on-equityand its equity-cost-of-capitalmultiplied by the firm's 'spread' beginning of the period. It is interesting,though, to note that GeneralMotors accountingequity value at the in the 1920sand GeneralElectric coined the term 'residual income' in the applied a variant of this concept divisions. See,for example,Bromwich and it to assess performanceof its decentralized the 1950sand used Walker (1998, p.392). 13 developedin 1982by the Stern Stewart& Company.SeeGrant (2003, p. 1). EVA was commercially "' See,for example,Madden (1999, p.202).

22

beginning of year t, which includes both the interest bearing debt and equity'5 it stands -as proxy for all cash invested in the company since its inception; WACCt is the weighted average cost of capital in year t, that is, the minimum rate of return demanded by both lenders and shareholders; ROICt is the return on the capital employed in the company in t and is calculated by dividing NOPATt by TICt-1; [ROICt - WACCJ is the year [WACCt * TICt-1] is the annual capital charge, i. e., the cash flow profitability spread; and required to compensate all the company's capital providers, equity as well as debt, for the the capital that has been used during the year. risk of Thus, for an ongoing concern, a firm's EVA can be defined as the difference between its un. levered net operating profit after tax (NOPAT) and a dollar charge for the in the business-as measured by the amount of total invested capital capital employed (TIC) times the weighted average cost of capital (WACC). The NOPAT in the EVA model the total pool of profits available to provide a cash return to all financial represents to the firm. It can be expressedin terms of the firm's pre-tax operating providers of capital EBIT, less unlevered operating taxes (T): profit,

NOPA T= EBIT(I - T) = (S - COGS- SG &A Exp - Dep)(I - T)

(2.6)

As is shown in equation (2.6), EBIT is a function of the firm's sales (S) less expenses including cost of goods sold (CoGS); selling, general and administrative expenses(SG&A Exp); and depreciation (Dep). Unlike the operating profits calculated by many companies,15It is important to note that Stern Stewart make a number of adjustments for their publicly available database as well as for their corporate clients not all of them available to the public.

23

both depreciationand businesstaxes (T) are subtractedfrom NOPAT because they aregenuine economic costs that have to be managed(Ehrbar, 1998, p. 131). In turn, for a firm financed solely with debt and equity, the weighted averagecost (WACC), is defined as follows: of capital

WACC = (WD)(RD)(1- T) + (WE)(RE)

(2.7)

where,WD= the proportion of total market value (debt plus equity) contributed by debt capital Wx, the proportion of total market value (debt plus equity) contributed by equity capital = T =Tax rate RD= pre-tax cost of debtRE: -'-'cost of

equity

16is defined as the sum of the working capital Total invested capital (TIC) usually fixed assets. The working capital requirement consists of accounts requirement and net inventories, net of accounts payable and accrued expenses. Taken together, receivable, these financial developments show that the firm's EVA can be expressedin basic terms as

follows:

[S CoGS SG &A Exp Dep], (I T) [WACC, x TIC, ] EVA, = _,

(2.8)

16 Also called "capital" or "capital employed".

24

The aboveEVA model (Eq. 2.8) demonstrates EVA is a financial management thatthat integrates operating efficiency and balance sheet management into one easily system that can be understood by all managers and operating people. The accessible measure that EVA is a performance metric that takes into account the cost of the model also shows the company employed -- a factor that no conventional measuresuch as accounting capital earnings per share (EPS), return on assets (ROA), or return on equity (ROE) earnings, includes. As a matter of fact, the opportunity cost of capital is what makes EVA a truly business value. 17By focusing on the financial metric and an accurate gauge of unique the opportunity cost for all capital employed, EVA profit remaining, after subtracting the real return a company can get on investor dollars. With EVA technology in shows hand, investors have the upper hand. If, for whatever reason, a firm cannot generate to cover its cost of capital; its investors will reduce the flow of capital to that enough return drastically re-price its stock downward to reflect their lower company and more expectations. The model also reveals that EVA is not only a measure of performance, but it is It measureshow and if a company createstrue value for also a measure of value creation. its shareholders. A company with a positive EVA creates value; a zero EVA maintains EVA suggestsa squanderingof value. In symbols, value; whereas a negative

17 should be noted, however, that like EVA, the accountingmetric ResidualIncome (RI), makesa cost of It over and abovethat the firm's profit to calculatewhat value is being generated equity capital chargeagainst investors.However, RI is much lesssophisticated to mention lesspopular than EVA due not requiredby the by consultantsas well asdue to the fact that it lacks the necessary adjustments to the absence support of balancesheetand the income statementfigures to removethe accountinganomalies.See equiredto both the for example,Francis and Minchington (2000).

25

If [ROIC - WACC] x capital employed >04 If [ROIC - WACC] x capital employed =04

value is created is maintained value

If [ROIC - WACC] x capital employed 34.80% > 5.70%

Panel B Relative Value-Relevance Test (pair-wise combinations) EVA/Tobin's Q R2 52.93% > EVA/TSR 42.11% Tobin's Q /TSR 35.66% >

Panel C Incremental Value-Relevance Test EVA/TSR - 36.41% FF EVA/Tobin's 18.13% >

139

TABLE 5.9 HYPOTHESIS (3) MULTIVARIATE REGRESSION RESULTS Panel A In MVA,, =& +Aln(profitability spreadj +A In(total invested copitalj Model +, 83 In(Lagged EVAJ )+ 85 +, 841n(TSR . In(Tobin's Qj + e,, it Statistic Number of Observations DependentVariable Variable Independent 1979 1nMVA InSPREAD,LnTIC, InLagEVA, InTSR, InTobinsQ R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InSPREAD) Std. error 95% C.I. IndependentVariable (InTIC) Std. error 95% C.I. IndependentVariable (InLagEVA) Std. error 95% C.I. IndependentVariable (InTSR) Std. error 95% C.I. 3.491256 0.1616931 3.174074/3.808437 0.129359 0.01586 0.0982846/0.1605073 0.3064579 0.0482726 0.2117649/0.4011508 0.04811 0.0178984 0.0130001/0.08322 0.0841718 0.0121273 0.0603826/0.107961 0.4724

140

IndependentVariable (Tobin'sQ) Std. error 95% C.I. t-statistic Constant Variable (InSPREAD) Independent Variable (InTIC) Independent Variable (InLagEVA) Independent Variable (InTSR) Independent IndependentVariable (InTobin'sQ) p-value: Constant IndependentVariable (InSPREAD) IndependentVariable (InTIC) IndependentVariable (InLagEVA) IndependentVariable (InTSR) IndependentVariable (InTobin'sQ)

0.2506594 0.0251512 0.2013222/0.2999966

21.59 8.16 6.35 2.69 6.94 9.97

0.000 0.000 0.000 0.007 0.000 0.000

141

TABLE 5.9 (continued)

HYPOTHESIS (3) MULTIVARIATE REGRESSION RESULTS Panel B Collinearity DiagnosticsVariable (InSPREAD) (InTIC) (InLagEVA) (InTSR) (InTobin'sQ) VIF 3.75 1.13 1.63 1.07 2.94 Tolerance 0.2666 0.8867 0.61340.9380 0.3406 R-Squared 0.7334 0.1133 0.3866 0.0620 0.6594

MeanVIF: ConditionNumber:

2.10 25.3668

142

TABLE 5.10 FIXED vs. RANDOM EFFECTS (Equation 5.13): Hausman TestIn MVAj, =, 80 +Aln(profitability spread,, ) +A In(total invested capital,, ) Model: +A In(Lagged EVA,, ) +, 84 ln(TSR,, ) + 8, In(Tobin's Qj + e,,

Fixed-Effects: Statistic Number of Observations DependentVariable IndependentVariable 1979 lnMVA InSPREAD,LnTIC, InLagEVA, InTSR, InTobinsQ R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InSPREAD) Std. error 95% C.I. IndependentVariable (InTIC) Std. error 95% C.I. IndependentVariable (InLagEVA) Std. error 95% C.I. IndependentVariable (InTSR) Std. error 95% C.I. 3.491256 0.1616931 3.174074/3.808437 0.129359 0.01586 0.0982846/0.1605073 0.3064579 0.0482726 0.2117649/0.4011508 0.04811 0.0178984 0.0130001/0.08322 0.0841718 0.0121273 0.0603826/0.107961 0.4724

143

IndependentVariable (Tobin'sQ) Std. error 95% C.I. t-statistic Constant IndependentVariable (InSPREAD) IndependentVariable (InTIC) IndependentVariable (InLagEVA) IndependentVariable (InTSR) IndependentVariable (InTobin'sQ) p-value: Constant IndependentVariable (InSPREAD) IndependentVariable (InTIC) IndependentVariable (InLagEVA) IndependentVariable (InTSR) IndependentVariable (InTobin'sQ)

0.2506594 0.0251512 0.2013222/0.2999966

21.59 8.16 6.35 2.69 6.94 9.97

0.000 0.000 0.000 0.007 0.000 0.000

TABLE 5.10 (continued)

144

Rai

irl

PA.

loom

]MIUCts'.

Statistic Number of Observations DependentVariable IndependentVariable 1979 lnMVA InSPREAD,LnTIC, InLagEVA, InTSR, InTobinsQ R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InSPREAD) Std. error 95% C.I. IndependentVariable (InTIC) Std. error 95% C.I. IndependentVariable (InLagEVA) Std. error 95% C.I. IndependentVariable (InTSR) Std. error 95% C.I. IndependentVariable (Tobin'sQ) Std. error 95% C.I. z-statistic Constant 27.69 3.639706 0.1314526 3.382063/3.897348 0.1187431 0.0147294 0.089874/0.1476122 0.307166 0.0472233 0.2146101/0.3997219 0.1137458 0.0164276 0.0815484/0.1459432 0.0839836 0.0118733 0.0607124/0.1072548 0.2802379 0.0201392 0.2407659/3.897348 0.4951

145

IndependentVariable (InSPREAD) IndependentVariable (InTIC) IndependentVariable (InLagEVA) IndependentVariable (InTSR) IndependentVariable (InTobin'sQ) p-value: Constant IndependentVariable (InSPREAD) IndependentVariable (InTIC) IndependentVariable (InLagEVA) IndependentVariable (InTSR) IndependentVariable (InTobin'sQ)

8.06 6.50 6.92 7.07 13.92

0.000 0.000 0.000 0.000 0.000 0.000

146

TABLE 5.10 (continued)Coefficlen s (b) lnSPREAD lnlagEVA lnTSR eqFIX 1293959 (B) 1187431 (b-B) Difference 0106529 . 0656358 -. 0001882 . b-V B)) sqrt(diag(V S. E. 0058808 . 0107 0071054 . 002469 . 50663

.

.

04811 . 0841718 .

1137458 . 0839836 .

b consistentunder Ho and Ha inconsistentunder Ha, efficient under Ho B Test: Ho: difference in coefficients not systematic (b-B)'[(V b-V B)/'(-I)I(b-B) 178.86 0.0000 Prob>chi2 = (5) chi2

147

TABLE5.11 STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING Panel A IIn MVA,, Model ao + a, In profitability spread,,+ e,, =

Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InSPREAD) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InSPREAD) p-value: Constant IndependentVariable (InSPREAD) 0.000 0.000 31.68 28.88 2.867663 0.0905222 2.690183/3.045142 0.239306 0.0082856 0.2230611/0.2555509 4431 lnMVA InSPREAD 0.3103

148

TABLE 5.11 (continued) STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING Panel BIIn MVA,, 8,, Model =, +Aln total invested capital,, + e,,

Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InTIC) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InTIC) p-value: Constant IndependentVariable (InTIC) 0.000 0.000 -28.97 31.45 -0.3355091 0.011583 -0.3582152/-0.3128031 1.042992 0.0331628 0.9779834/1.108 8432 1nMVA InTIC 0.1409

149

TABLE 5.11 (continued) STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING Panel C lIn MVA,, Model: Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InLagEVA) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InLagEVA) p-value: Constant IndependentVariable (InLagEVA) 0.000 0.000 14.43 10.23 0.7036367 0.0487725 0.6080079/0.7992655 0.1427 0.013955 0.1153382/0.1700617 3970 1nMVA InLagEVA 0.3020 yo + y, In Lagged EVA,,

150

TABLE 5.11 (continued) STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING Panel D nMVA,-I= Model: Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InTSR) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InTSR) p-value: Constant IndependentVariable (InTSR) 0.000 0.000 6.47 10.53 0.1249479 0.0193188 0.0870726/0.1628232 0.1202252 0.0114126 0.0978502/0.1426001 4966 1nMVA InTSR 0.0570 + 9, In TSR, o5o

151

TABLE 5.11 (continued) STATISTICAL RESULTS OF STEP ONE OF HYPOTHESIS (3) TESTING Panel E lIn MVA,, Model: Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InTobin'sQ) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InTobin'sQ) p-value: Constant IndependentVariable (InTobin'sQ) 0.000 0.000 37.63 39.63 2.8353 0.0753512 2.687584/2.983016 0.4931501 0.0124448 0.4687538/0.5175465 6715 lnMVA InTobin'sQ 0.3480 =/Tl /To+

In Tobin's Q,,

152

TABLE 5.12 STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel AIn AfVAj, =, 80 +Aln(profitability Model spreadj +A In(Tobin's Q,,) + e,,

Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InSPREAD) Std. error 95% C.I. IndependentVariable (InTobin'sQ) Std. error 95% C.I. t-statistics: Constant independentVariable (InSPREAD) IndependentVariable (InTobin'sQ) p-value: Constant IndependentVariable (InSPREAD) IndependentVariable (InTobin'sQ) 0.000 0.000 0.000 33.27 14.01 15.06 3.41377 0.1026209 3.212555/3.614984 0.1477277 0.0105464 0.1270488/0.1684066 0.2639882 0.0175321 0.2296119/0.2983644 3686 1nMVA InSPREAD,InTobin'sQ 0.4311

153

TABLE 5.12 (continued) STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel B

Model In MVA,, = 80 +, 8, ln(profitability spread,,) +A ln(TSR,, + e,Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InSPREAD) Std. error 95% C.I. IndependentVariable (InTSR) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InSPREAD) IndependentVariable (InTSR) p-value: Constant IndependentVariable (InSPREAD) IndependentVariable (InTSR) 0.000 0.000 0.000 25.86 22.05 8.59 2.959312 0.114416 2.734938/3.183686 0.2284903 0.010361 0.208168/0.2488127 0.0918727 0.0106942 0.0709009 2902 1nMVA InSPREAD, InTSR 0.3794

154

TABLE 5.12 (continued) STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel C lInMVAi, Model Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InSPREAD) Std. error 95% C.I. IndependentVariable (InTIC) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InSPREAD) IndependentVariable (InTIC) p-value: Constant IndependentVariable (InSPREAD) independent Variable (InTIC) 0.000 0.000 0.000 25.92 24.81 15.73 2.399658 0.0925747 2.218154/2.581162 0.2058962 0.0082986 0.1896257/0.2221667 0.5441606 0.0345928 0.4763372/0.6119839 4429 lnMVA InSPREAD,InTIC 0.4029 6,, +, 8, In(profitability spread,,)+ 821n(TIC,, )+e,, =,

155

STATISTICAL

TABLE 5.12 (continued) RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel Dspreadj +A In(Lagged E VAlt)+e,

IIn WA,, 80 +, 8, In(profitability Model =

StatisticNumber of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InSPREAD) Std. error 95% C.I. IndependentVariable (InLagEVA) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InSPREAD) IndependentVariable (InLagEVA) p-value: Constant IndependentVariable (InSPREAD) independentVariable (InLagEVA) 0.000 0.000 I 0.000 I 29.25 24.57 3.20 3.249292 0.1111003 3.031438/3.467147 0.2548422 0.0103714 0.2345052/0.2751793 0.0448538 0.0140203 0.0173616/0.0723459 3261 1nMVA InSPREAD,InLagEVA 0.4030

156

TABLE 5.12(continued) STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel E [In MYA,, Model 80 +, 8, In(total investedcapitalj +)62In(Tobin's Q,, = + e,,

StatisticNumber of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InTIC) Std. error 95% C.I. IndependentVariable (InTobin'sQ) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InTIC) IndependentVariable (InTobin'sQ) p-value: Constant IndependentVariable (InTIC) IndependentVariable (InTobin'sQ) 0.000 0.000 0.000 27.49 16.67 31.66 2.246136 0.081698 2.085977/2.406294 0.6485643 0.0389131 0.5722803/0.7248484 0.4136267 0.013066 0.3880125/0.439241 6712 1nMVA InTIC, InTobin'sQ 0.3784

157

STATISTICAL

TABLE 5.12 (continued) RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel F

Model In MVA,, = 80 + P, In(total investedcapital, +A ln(TSR,, + e,,Statistic Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InTIC) Std. error 95% C.I. IndependentVariable (InTSR) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InTIC) IndependentVariable (InTSR) p-value: Constant independent Variable (InTIC) IndependentVariable (InTSR) 0.000 0.000 0.066 -1.84 19.95 -1.84 -0.0371087 0.020153 -0.0766195/0.0024021 0.8733576 0.0437758 0.7875333 0.1153032 0.0109023 0.0939288/0.1366775 4964 lnMVA InTIC, InTSR 0.1595

158

TABLE 5.12 (continued) STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel G IIn MVAj, 60 +, 61In(Lagged EVA,, A In(Tobin's Model )+ Q,,) + e,, =, Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InLagEVA) Std. error 95% C.I. IndependentVariable (InTobin'sQ) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InLagEVA) IndependentVariable (InTobin'sQ) p-value: Constant IndependentVariable (InLagEVA) IndependentVariable (InTobin'sQ) 0.000 0.000 0.000 34.33 5.05 30.45 3.369323 0.0981309 3.176901/3.561745 0.06623305 0.0131242 0.040957/0.0919653 0.4924473 0.0161722 0.4607358/0.5241589 3313 lnMVA InLagEVA, InTobin'sQ 0.4277

159

TABLE 5.12 (continued) STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel H IIn WA,, 80 +,Bl In(Lagged EVAJ +A ln(TSR,, Model = ) + e,, Number of Observations DependentVariable IndependentVariable R-Squared. Coefficients: Constant Std. error 95% C.I. IndependentVariable (InLagEVA) Std. error 95% C.I. IndependentVariable (InTSR) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InLagEVA) IndependentVariable (InTSR) p-value: Constant IndependentVariable (InLagEVA) IndependentVariable (InTSR) 0.000 0.000 100 14.58 7.63 9.32 0.9106314 0.0624719 0.7881103/1.033152 0.1326416 0.0173883 0.0985394/0.1667438 0.1196001 0.0128377 0.0944226/0.1447776 2576 1nMVA InLagEVA, InTSR 0.3156

160

TABLE 5.12 (continued) STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel I Model In MVAj, =, 80 +Aln(total Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InTIC) Std. error 95% C.I. IndependentVariable (InLagEVA) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InTIC) IndependentVariable (InLagEVA) p-value: Constant IndependentVariable (InTIC) IndependentVariable (InLagEVA) 0.000 0.000 0.000 9.73 18.01 8.54 0.4753706 0.0488642 0.379562/0.5711792 0.6940391 0.0385467 0.6184601/0.769618 0.1156793 0.0135523 0.0891071/0.1422515 investedcapital,,) 3966 lnMVA InTIC, InLagEVA 0.2844+ 82 .

In(Lagged EVAJ + e,,

161

TABLE 5.12(continued) STATISTICAL RESULTS OF STEP TWO OF HYPOTHESIS (3) TESTING Panel J IIn MVA,, 8, Model =, +Aln(TSR,, ) +P2 In(Tobin's Qi,) + e, Number of Observations DependentVariable IndependentVariable R-Squared Coefficients: Constant Std. error 95% C.I. IndependentVariable (InTSR) Std. error 95% C.I. IndependentVariable (InTobin'sQ) Std. error 95% C.I. t-statistics: Constant IndependentVariable (InTSR) IndependentVariable (InTobin'sQ) p-value: Constant IndependentVariable (InTSR) IndependentVariable (InTobin'sQ) 0.000 0.000 0.000 29.29 8.55 28.16 2.835656 0.0968174 2.645834/3.025478 0.0940835 0.0110063 0.0725042/0.1156627 0.4528348 0.0160809 0.4213063/0.4843633 4410 1nMVA InTSR, InTobin'sQ 0.3566

162

TABLE 5.13 HYPOTHESIS (3) RELATIVE VALUE-RELEVANCE Panel A Relative Value-RelevanceTest (individual) Profitability Spread IF 38.65% > Tobin's Q Lagged EVA Total Total Invested Shareholder Capital Return - ,> 14.09% 5.70% TEST

34.80% > 30.20% >

Panel B RELATIVE VALUE-RFLEVANCE TEST (pair-wise combinations in order of decreasingpower)

Pair-Wise CombinationProfitability Spread/ Tobin's Q Lagged EVA / Tobin's Q Profitability Spread/ LaggedEVA Profitability Spread/ Total InvestedCapital Return Profitability Spread/ Total Shareholder Total InvestedCapital / Tobin's Q Total ShareholderReturn/ Tobin's Q Return EVA / Total Shareholder Lagged Total InvestedCapital / LaggedEVA

R243.11 42.77 40.30 40.29 37.94 37.84 35.66 31.56 28.44

Return 15.95 / Total Shareholder Total Invested Capital

163

TABLE 5.14 HYPOTHESIS 3 INCREMENTAL VALUE-RELEVANCE TEST

Pair-Wise Combination

Incremental Valuerelevance8.31 7.97 10.10 26.20 32.24 3.04 0.86 25.86 -1.76 10.25 4.46 12.57 1.65 1.64 -0.81 23.75 29.96 1.36 14.35 1.86

Profitability Spread/ Tobin's Q Lagged EVA / Tobin's Q Profitability Spread/ LaggedEVA Profitability Spread/ Total InvestedCapital Profitability Spread/ Total Shareholder Return Total Invested Capital / Tobin's Q Total ShareholderReturn/ Tobin's Q Lagged EVA / Total Shareholder Return Total Invested Capital / LaggedEVA Total Invested Capital / Total Shareholder Return Tobin's Q/ Profitability Spread Tobin's Q/ LaggedEVA Lagged EVA / Profitability Spread Total Invested Capital / Profitability Spread Total ShareholderReturn / Profitability Spread Tobin's Q/ Total InvestedCapital Return Tobin's Q/ Total Shareholder Total ShareholderReturn / LaggedEVA Lagged EVA / Total InvestedCapital ShareholderReturn / Total InvestedCapital Total

164

Appendix C: The 2002 Stern Stewart Performance 1000

Top 1000Creatorsof Shareholderwealth amongU. s. Companies,1998-2002 Market value Added (MVA)

The2002Stern Stewart Performance 1000 Top 1000Creators of Shareholder Wealth AmongU.S. Companies, 1998-2002 MVARank 2002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 2001 2 3 1 5 12 10 11 14 8 9 6 20 4 21 24 25 19 23 18 16 17 15 13 29 7 30 22 71 27 36 39 1998 Ticker 1 MSFT 6 WIVIT 2 GE 16 JNJ 15 PFE 10 MIRK 20 PG 13 IBM 11 XOM 8 KO 3 INTC 18 DELL C 5 CSCO 51 ORCL 58 AMGN 25 LLY UPS FNM 44 PEP 21 MO 30 ABT 23 HD 62 MMM AIG 48 MDT 28 WYE 74 CMCSA 59 BUD 33 DD 75 PHA Company name Microsoft Corp Wal-Mart Stores General Electric Co Johnson & Johnson Pfizer Inc Merck & Co Procter & Gamble Co Intl Business Machines Corp Exxon Mobil Corp Coca-Cola Co Intel Corp Dell Computer Corp Citigroup Inc Cisco Systems Inc Oracle Corp Amgen Inc Lilly (Eli) & Co United Parcel Service Inc Fannie Mae Pepsico Inc Altria Group Inc Abbott Laboratories Home Depot Inc 3M Co American International Group Medtronic Inc Wyeth Comcast Corp Anheuser-Busch Cos Inc Du Pont (E 1)De Nemours Pharmacia Corp Industry Code 4510 2550 2010 3520 3520 3520 3030 4520 1010 3020 4520 4520 4020 4520 4510 3520 3520 2030 4020 3020 3020 3520 2550 2010 4030 3510 3520 2540 3020 1510 3520 Industry Name Software & Services Retailing Capital Goods Pharmaceuticals& Biotech Pharmaceuticals& Biotech Pharmaceuticals& Biotech Household& Personal Prods Technology Hardware& Equip Energy Food Beverage & Tobacco Technology Hardware& Equip Technology Hardware& Equip Diversified Financials Technology Hardware& Equip Software & Services Pharmaceuticals& Biotech Pharmaceuticals& Biotech Transportation Diversified Financials Food Beverage & Tobacco Food Beverage & Tobacco Pharmaceuticals& Biotech Retailing Capital Goods Insurance Health Care Equipment& Svcs Pharmaceuticals& Biotech Media Food Beverage & Tobacco Materials Pharmaceuticals& Biotech

165

32 33 34 35 36 37 38 3940 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78

28 35 92 34 49 46 48 3347 26 37 63 40 59 68 96 53 67 42 54 60 41 55 102 73 85 32 56 31 80 82 45 180 124 38 64 99 97 166 103 128 341 270 51 81 118 111

17 BMY FIRE 63 EBAY AXP 67 CL 98 LOW 198 UNH 73 WAGWFC KFT BLS BAC TGT FDC QCOM FRX G SYY VZ MIVIC UTX SGP KSS SLM COX DISH MWD FITB TXN GCI EMIR ADP L AFL AMAT LIVIT SO GIS AMZN AVP SYK NXTL BSX GS HDI DNA WWY

Bristol Myers Squibb Federal Home Loan Mortg Corp eBay Inc American Express Colgate-PalmoliveCo Lowes Cos UnitedhealthGroup Inc Walgreen CoWells Fargo & Co Kraft Foods Inc Bellsouth Corp Bank Of America Corp Target Corp First Data Corp Qualcomm Inc Forest Laboratories A -CI Gillette Co Sysco Corp Verizon Communications Marsh & Mclennan Cos United Technologies Corp Schering-Plough KohIs Corp SLM Corp Cox Communications -Cl A Echostar Commun Corp -CIA Morgan Stanley Fifth Third Bancorp Texas Instruments Inc Gannett Co Emerson Electric Co Automatic Data Processing Liberty Media Corp -Ser A Aflac Inc Applied Materials Inc Lockheed Martin Corp Southern Co General Mills Inc Amazon. Com Inc Avon Products Stryker Corp Nextel Communications Boston Scientific Corp Goldman Sachs Group Inc Harley-Davidson Inc Genentech Inc Wrigley (Wm) Jr Co

32 69 156 90 344 46 167 27 68 31 140 84 227

52 91 77 72 54 87 148 163 131 53 117 224 127 110 170 173 153

3520 4020 2550 4020 3030 2550 3510 3010 4010 3020 5010 4010 2550 2020 4520 3520 3030 3010 5010 4030 2010 3520 2550 4020 2540 2540 4020 4010 4520 2540 2010 2020 2540 4030 4520 2010 5510 3020 2550 3030 3510 5010 3510 4020 2510 3520 3020

Pharmaceuticals & Biotech Diversified Financials Retailing Diversified Financials Household & Personal Prods Retailing Health Care Equipment & Svcs Food & Drug Retailing Banks Food Beverage & Tobacco Telecommunication Services Banks Retailing Commercial Svcs & Supplies Technology Hardware & Equip Pharmaceuticals & Biotech Household & Personal Prods Food & Drug Retailing Telecommunication Services Insurance Capital Goods Pharmaceuticals & Biotech Retailing Diversified Financials Media Media Diversified Financials Banks Technology Hardware & Equip Media Capital Goods Commercial Svcs & Supplies Media Insurance Technology Hardware & Equip Capital Goods Utilities Food Beverage & Tobacco Retailing Household & Personal Prods Health Care Equipment & Svcs Telecommunication Services Health Care Equipment & Svcs Diversified Financials Automobiles & Components Pharmaceuticals & Biotech Food Beverage & Tobacco

166

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 ill 112 113 114 115 116 117 118 119 120 121 122123 124 125

65 75 131 116 100 93 151 89 135 90 58 110 126 105 145 62 109 186 106 179 84 107 50 115 981 222 119 182 181 157 121 138 69 52 146 57 86 156 70 43 108 213 123 176112 72 136

78 162 47 241 116 179 82 94 187 100 119 36 158 43 243 438 144 125 157 38 145 104 528 151 186 139 101 367 96 176 201 147 264 83 108 109 711 113 246103 ill .

VIA.B MXIM GPS BBBY K PAYX DOW ITW TRB COST KR13 FOX EMC LLTC PGR DIS ADI APOL LUV ZMH OMC CAT MCD TJX CCU GILD MHP LXK FDX CVC D GDT GD BK SBUX MER BBY EXC KMB BAX SLE STJ GMH AGNHNZ CAH ALL

Viacom Inc B -Cl Maxim IntegratedProducts Gap Inc Bed Bath & Beyond Inc Kellogg Co PaychexInc Dow Chemical Illinois Tool Works Tribune Co Costco Wholesale Corp Mbna Corp Fox EntertainmentGroup Inc EMC Corp/Ma Linear TechnologyCorp ProgressiveCorp-Ohio Disney (Walt) Co Analog Devices Apollo Group Inc -CIA SouthwestAirlines Zimmer HIdgs Inc Omnicom Group Caterpillar Inc McDonaldsCorp Tjx CompaniesInc Clear Channel Communications Gilead Sciences Inc McGraw-HillCompanies Lexmark Intl Inc -CIA Fedex Corp CablevisionSys Corp -Cl A Dominion ResourcesInc Guidant Corp General DynamicsCorp Bank Of New York Co Inc Starbucks Corp Merrill Lynch & Co Best Buy Co Inc Exelon Corp Kimberly-ClarkCorp Baxter InternationalInc Sara Lee Corp St Jude Medical Inc General Motors Cl H Allergan IncHeinz (H J) Co Cardinal Health Inc Allstate Corp

2540 4520 2550 2550 3020 2020 1510 2010 2540 2550 4020 2540 4520 4520 4030 2540 4520 2020 2030 3510 2540 2010 2530 2550 2540 3520 2540 4520 2030 2540 5510 3510 2010 4010 2530 4020 2550 5510 3030 3510 3020 3510 2540 3520 3020 3510 4030

Media Technology Hardware & Equip Retailing Retailing Food Beverage & Tobacco Commercial Svcs & Supplies Materials Capital Goods Media Retailing Diversified Financials Media Technology Hardware & Equip Technology Hardware & Equip Insurance Media Technology Hardware & Equip Commercial Svcs & Supplies Transportation Health Care Equipment & Svcs Media Capital Goods Hotels Restaurants & Leisure Retailing Media Pharmaceuticals & Biotech Media Technology Hardware & Equip Transportation Media Utilities Health Care Equipment & Svcs Capital Goods Banks Hotels Restaurants & Leisure Diversified Financials Retailing Utilities Household & Personal Prods Health Care Equipment & Svcs Food Beverage & Tobacco Health Care Equipment & Svcs Media Pharmaceuticals & Biotech Food Beverage & Tobacco Health Care Equipment & Svcs Insurance

167

126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172

130 122 152 129 104 209 148 173 147 127 114 153 139 155 259 77 185 169 165 178 189 211 174 91 201 78 133 237 191 200 95 192 243 245 140 143 214 184 187 261 216 221 226 132 74 287 175

311 95 317 88 192 222 213 182 189 106 256 343 393 34 271 301 115 305 245 526 183 120 99 136 431 262 292 249 259 135 229 546 188 132 236 293 355 401 270 762 194

WLP CPB AZO PBI XLNX PX HSY CAG DHR NKE STI ITT ADBE ERTS EXPE HPQ BMET MEDI SPLS UCOMA NYT IGT BDX STT CLX AA YUM GDW GENZ INTU MEL HR13 ECL WPO LTD UVN CHIR APID EL WTW` FPL FDO SSP KLAC HCA SYMC ALTR

Wellpoint Hlth Netwrk -CIA Campbell Soup Co Autozone Inc Pitney Bowes Inc Xilinx Inc Praxair Inc Hershey Foods Corp Conagra Foods Inc Danaher Corp Nike Inc -Cl B Suntrust Banks Inc ITT IndustriesInc Adobe Systems Inc. ElectronicArts Inc Expedia Inc Hewlett-PackardCo Biomet Inc MedimmuneInc Staples Inc Unitedglobalcorn -Cl A Inc New York Times Co -Cl A Intl Game Technology Becton Dickinson& Co State Street Corp Clorox Co/De Alcoa Inc Yum Brands Inc Golden West FinancialCorp GenzymeCorp Intuit Inc Mellon FinancialCorp Block H&R Inc Ecolab Inc WashingtonPost -Cl B Limited Brands Inc UnivisionCommunicationsInc Chiron Corp Air Products& ChemicalsInc Lauder Estee Cos Inc -Cl A Weight Watchers Intl Inc FPL Group Inc Family Dollar Stores EW Scripps -CIA Kla-TencorCorp HCA Inc SymantecCorp Altera Corp

3510 3020 2550 2020 4520 1510 3020 3020 2010 2520 4010 2010 4510 4510 4510 4520 3510 3520 2550 2540 2540 2530 3510 4020 3030 1510 2530 4010 3520 4510 4010 2020 1510 2540 2550 2540 3520 1510 3030 2550 5510 2550 2540 4520 3510 4510 4520

HealthCare Equipment Svcs & Food Beverage& Tobacco Retailing CommercialSvcs& Supplies TechnologyHardware& Equip Materials Food Beverage& Tobacco Food Beverage& Tobacco CapitalGoods ConsumerDurables& Apparel Banks CapitalGoods Software& Services Software& Services Software& Services TechnologyHardware& Equip HealthCare Equipment Svcs & Pharmaceuticals Biotech & Retailing Media Media Hotels Restaurants Leisure & HealthCare Equipment Svcs & DiversifiedFinancials Household PersonalProds & Materials HotelsRestaurants Leisure & Banks Pharmaceuticals Biotech & Software& Services Banks Svcs & Supplies Commercial Materials Media Retailing Media & Pharmaceuticals Biotech Materials Household& PersonalProds Retailing Utilities Retailing Media TechnologyHardware& Equip HealthCare Equipment& Svcs Software& Services TechnologyHardware& Equip

168

173 174 175 176 177 178 179180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219

177 188 266 158 203 247 250171 134 168 149 162 960 227 232 256 284 142 263 280 241 172 240 225 161 101 76 390 231 255 258 113 450 492 150 224 343 262 276 230 352 234 204 274 217 44 353 .

493 255 514 166 124 184 586477 302 225 288 37

ACS LIST APA MAR AT PPG BJSLEH NEM VRTS BHI APC YHOO BEN ATH KRI BF. B IDPH SOTR PPL PEG CTAS DE AVY DGX Cl CE COH BGEN CINF ESRX NTRS MYL CFC MAS RMK EXPD DG ROH DOV VAR NTAP RX ASD PGN CVX BRL

Affiliated COMPSvcs -CIA UST Inc Apache Corp Marriott Intl Inc Alltel Corp PPG Industries Inc BJ Services CoLehman Brothers Holdings Inc Newmont Mining Corp Veritas Software Co Baker-Hughes Inc Anadarko Petroleum Corp Yahoolnc Franklin Resources Inc Anthem Inc Knight-Ridder Inc Brown-Forman -Cl B IDEC Pharmaceuticals Corp Southtrust Corp PPL Corp Public Service Entrp Cintas Corp Deere & Co Avery Dennison Corp Quest Diagnostics Inc Cigna Corp Concord Efs Inc CoachInc Biogen Inc Cincinnati Financial Corp Express Scripts Inc Northern Trust Corp Mylan Laboratories Countrywide Financial Corp Masco Corp Aramark Corp Expeditors Intl Wash Inc Dollar General Corp Rohm & Haas Co Dover Corp Varian Medical Systems Inc Network Appliance Inc IMS Health Inc American Standard COSInc Progress Energy Inc Chevrontexaco Corp Barr Laboratories Inc

350 286 575 374 287 207 436 204 986 168 266 193 394 441 196 494 212 214 218 956 276 141 373 327 39 717

4510 3020 1010 2530 5010 1510 1010 4020 1510 4510 1010 1010 4510 4020 3510 2540 3020 3520 4010 5510 5510 2020 2010 2020 3510 3510 2020 2520 3520 4030 3510 4010 3520 4020 2010 2020 2030 2550 1510 2010 3510 4520 3510 2010 5510 1010 3520

Software & Services Food Beverage & Tobacco Energy Hotels Restaurants & Leisure Telecommunication Services Materials Energy Diversified Financials Materials Software & Services Energy Energy Software & Services Diversified Financials Health Care Equipment & Svcs Media Food Beverage & Tobacco Pharmaceuticals & Biotech Banks Utilities Utilities Commercial Svcs & Supplies Capital Goods Commercial Svcs & Supplies Health Care Equipment & Svcs Health Care Equipment & Svcs Commercial Svcs & Supplies Consumer Durables & Apparel Pharmaceuticals & Biotech Insurance Health Care Equipment & Svcs Banks Pharmaceuticals & Biotech Diversified Financials Capital Goods Commercial Svcs & Supplies Transportation Retailing Materials Capital Goods Health Care Equipment & Svcs Technology Hardware & Equip Health Care Equipment & Svcs Capital Goods Utilities Energy Pharmaceuticals & Biotech

169

220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266

326 275 295 183 206 298 272 271 196 220 316 125 325 400 344 301 318 257 292 330 252 332 328 233 317 388 459 198 120 194 260 361 190 279 304 202 83 538 336 160 269 404 223 379 265 299 447

469 319 308 840 306 267 484 640 150 550 758 425 459 281 412 453 269 205 381 601 562 427 230 93 64 404 360 329 388

365 322 210 407 573 238 437 675 806

FTN EOG GPC FISV SNV KMI TSS JCI BBT MCHP BEAS COP PCAR WFMI MTB OXY MKC HLT NFB SIAL CDWC ETN UNP TIF WON CHRW PIXR VVY PCs WMI JP AEE AEP HMA WIVI SDS SCH HCBK FCX USAI RSH FE ABC ANF HET CPS XTO

First Tennessee Natl Corp EOG Resources Inc Genuine Parts Co Fiserv Inc Synovus Financial Cp Kinder Morgan Inc Total System ServicesInc Johnson Controls Inc BB&T Corp Microchip TechnologyInc Bea Systems Inc Conocophillips Paccar Inc Whole Foods Market Inc M&T Bank Corp Occidental PetroleumCorp McCormick & Co Hilton Hotels Corp North Fork Bancorporation Sigma-Aldrich Cdw ComputerCenters Inc Eaton Corp Union Pacific Corp Tiffany & Co Westwood One Inc CH RobinsonWorldwideInc Pixar WeyerhaeuserCo Sprint Pcs Group Waste ManagementInc Jefferson-PilotCorp Ameren Corp American Electric Power Health ManagementAssoc WashingtonMutual Inc Sungard Data SystemsInc Schwab (Charles)Corp Hudson City Bancorp Freeprt Mcmor Cop&GId -Cl B USA Interactive RadioshackCorp FirstenergyCorp AmerisourcebergenCorp Abercrombie& Fitch -Cl A Harrahs EntertainmentInc ChoicepointInc XTO Energy Inc

4010 1010 2550 2020 4010 5510 2020 2510 4010 4520 4510 1010 2510 3010 4010 1010 3020 2530 4010 1510 2550 2010 2030 2550 2540 2030 2540 1510 5010 2020 4030 5510 5510 3510 4010 4510 4020 4010 1510 2550 2550 5510 3510 2550 2530 2020 1010

Banks Energy Retailing Commercial Svcs & Supplies Banks Utilities Commercial Svcs & Supplies Automobiles & Components Banks Technology Hardware & Equip Software & Services Energy Automobiles & Components Food & Drug Retailing Banks Energy Food Beverage & Tobacco Hotels Restaurants & Leisure Banks Materials Retailing Capital Goods Transportation Retailing Media Transportation Media Materials Telecommunication Services Commercial Svcs & Supplies Insurance Utilities Utilities Health Care Equipment & Svcs Banks Software & Services Diversified Financials Banks Materials Retailing Retailing Utilities Health Care Equipment & Svcs Retailing Hotels Restaurants & Leisure Commercial Svcs & Supplies Energy

170

267 268 269 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299300 301 302 303 304 305 306 307 308 309 310 311 312 313

322 565 307 293 239 363 238 244 410 338 285 207 342 337 335 541 288 470 461 167 355 368 371 814 302 401 394 378 451 297 387 384 438340 417 315 423 331 449 366 357 437 516 370 359 264 248

498 WSM 832 DRYR 250 EFX Fil SEIC 203 DNB 295 MOLX 199 UCL ROOM 576 MERQ 253 ED 415 PBG 524 LNCR COL 445 ROST 282 CTXS 303 DJ 756 IRM 870 CECO PNC 280 JBL 456 CIN 540 QLGC 958 WFR TROW JNPR 564 LIZ 510 EAT 617 BLL 332 GWW 790 NVR 911 ETR 972 DF468 959 495 313 458 134 592 372 613 316 512 348 FAST PFG CMX SRE WAT BCR CCE PDCO LM NWAC XRAY SHW LLL HOT

Williams-SonomaInc Dreyer's Grand Ice Cream Inc Equifax Inc Federated Investors Inc Sei InvestmentsCo Dun & BradstreetCorp Molex Inc Unocal Corp Hotels.Com Mercury InteractiveCorp ConsolidatedEdison Inc Pepsi Bottling Group Inc Lincare Holdings Inc Rockwell Collins Inc Ross Stores Inc Citrix Systems Inc Dow Jones & Co Inc Iron Mountain Inc Career EducationCorp PNC FinancialSvcs Group Inc Jabil Circuit Inc Cinergy Corp Qlogic Corp Memc ElectronicMatrialsInc Price (T. Rowe) Group Juniper NetworksInc Liz Claiborne Inc Brinker Intl Inc Ball Corp Grainger (W W) Inc NVR Inc Entergy Corp Dean Foods CoFastenal Co Principal Financial Grp Inc Caremark Rx Inc Sempra Energy Waters Corp Bard (C. R.) Inc Coca-Cola Enterprises Patterson Dental Co Legg Masoninc Northwest Airlines Corp Dentsply Internatl Inc Sherwin-Williams Co L-3 Communications Hldgs Inc Starwood Hotels&Resorts Wrld

2550 3020 2020 4020 4020 2020 4520 1010 4510 4510 5510 3020 3510 2010 2550 4510 2540 2020 2020 4010 4520 5510 4520 4520 4020 4520 2520 2530 1510 2010 2520 5510 3020 2010 4020 3510 5510 4520 3510 3020 3510 4020 2030 3510 2550 2010 2530

Retailing Food Beverage & Tobacco Commercial Svcs & Supplies Diversified Financials Diversified Financials Commercial Svcs & Supplies Technology Hardware & Equip Energy Software & Services Software & Services Utilities Food Beverage & Tobacco Health Care Equipment & Svcs Capital Goods Retailing Software & Services Media Commercial Svcs & Supplies Commercial Svcs & Supplies Banks Technology Hardware & Equip Utilities Technology Hardware & Equip Technology Hardware & Equip Diversified Financials Technology Hardware & Equip Consumer Durables & Apparel Hotels Restaurants & Leisure Materials Capital Goods Consumer Durables & Apparel Utilities Food Beverage & Tobacco Capital Goods Diversified Financials Health Care Equipment & Svcs Utilities Technology Hardware & Equip Health Care Equipment & Svcs Food Beverage & Tobacco Health Care Equipment & Svcs Diversified Financials Transportation Health Care Equipment & Svcs Retailing Capital Goods Hotels Restaurants & Leisure

171

314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360

212 372 381 554 345 154 402 432 413 267 334 393 306 350 442 365 235 455 425 982 380 309 506 303 532 314 436 376 291 570 375 544 319 673 462 254 563 61 141 435 430 426 420 278 674 700 312

979 LH 623 ACV 448 DLX PTV 687 FHCC MET 334 IFF 937 OEI 248 ABI 467 RHI 352 HB 451 HRL ABK TCB 896 PTEN 718 ADVP 391 PSFT CBSS CBH 974 3UALAQ 429 DTE 336 LEG BPOP 509 ESV 867 CHS 312 PH 616 S11 NCF 421 DLTR 872 COCO 635 MUR NYB 290 VMC 338 RCNC 261 CTL SPC 347 SEPR 122 DUK 178 CD 385 OSI UB 560 NDN 416 GNTX 447 OHP DRL 917 AMLN MI

Laboratory Cp Of Amer HIdgs Alberto-Culver Co B -Cl Deluxe Corp Pactiv Corp First Health Group Corp Metlife Inc Intl Flavors & Fragrances Ocean Energy Inc Applera Corp Applied Biosys Robert Half Intl Inc Hillenbrand Industries Hormel Foods Corp Ambac Financial Gp TCF Financial Corp Patterson-UtiEnergy Inc Advancepcs Peoplesoft Inc Compass BancsharesInc Commerce Bancorp Inc/Nj UAL Corp Dte Energy Co Leggett & Platt Inc Popular Inc Ensco InternationalInc Chicos Fas Inc Parker-HannifinCorp Smith InternationalInc National CommerceFinancial Dollar Tree Stores Inc CorinthianColleges Inc Murphy Oil Corp New York Cmnty BancorpInc Vulcan MaterialsCo RCN Corp Centurytel Inc St Paul Cos Sepracor Inc Duke Energy Corp Cendant Corp Outback SteakhouseInc UnionbancalCorp 99 Cents Only Stores Gentex Corp Oxford Health Plans Inc Doral Financial Corp Amylin PharmaceuticalsInc Marshall & Ilsley Corp

3510 3030 2020 1510 3510 4030 1510 1010 3510 2020 3510 3020 4030 4010 1010 3510 4510 4010 4010 2030 5510 2520 4010 1010 2550 2010 1010 4010 2550 2020 1010 4010 1510 5010 5010 4030 3520 5510 2020 2530 4010 2550 2510 3510 4020 3520 4010

Health Care Equipment & Svcs Household & Personal Prods Commercial Svcs & Supplies Materials Health Care Equipment & Svcs Insurance Materials Energy Health Care Equipment & Svcs Commercial Svcs & Supplies Health Care Equipment & Svcs Food Beverage & Tobacco Insurance Banks Energy Health Care Equipment & Svcs Software & Services Banks Banks Transportation Utilities Consumer Durables & Apparel Banks Energy Retailing Capital Goods Energy Banks Retailing Commercial Svcs & Supplies Energy Banks Materials Telecommunication Services Telecommunication Services Insurance Pharmaceuticals & Biotech Utilities Commercial Svcs & Supplies Hotels Restaurants & Leisure Banks Retailing Automobiles & Components Health Care Equipment & Svcs Diversified Financials Pharmaceuticals & Biotech Banks

172

361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407

489 483 385 837 477 503 159 360 472 286 445 229 704 431 452 382 832 611 579457 480 766 268 646 429 453 484 491 323 349 518 661 399 631 556 501 416 508 310 583 369 374 555 163 586 428 624

254 57 608 854

678 432 298 521 798 531 507 476 929 383655 486 961 424 733 422 650 652

BRO ASO SEE LVLT DBD EQT A AJG JEC DRI VFC NVLS ENDP ETIVI FSH LAMR JBLU CVH APCCMNI MDP KMX DST RCII KKD HSP APH SCG TRH NEU HAR CELG FLR SCIO TBL GRA UTSI EDIVIC DVN PPP EC CEY ISCA USB COLM BMS FIC

Brown & Brown Inc Amsouth Bancorporation Sealed Air Corp Level 3 Commun Inc Diebold Inc Equitable ResourcesInc Agilen