Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 2, No 12, 2011 22 Economic Value Added (EVA) and Shareholders Wealth Creation: A Factor Analytic Approach A.Vijayakumar * Erode Arts and Science College, Erode, Tamilnadu, India * E-mail of the corresponding author: drvijayponne_erode@bsnl.in Abstract Corporate performance is affected by various factors ranging from company specific, industry specific and economic variables. There had been wide acceptance on the objective of the firm to maximize the value. Among the set of popular value based management, Economic Value Added (EVA) is the most prominent. Therefore, in this study, an attempt has been made whether EVA has got a better predictive power of selected automobile companies in India. In order to disclose the factors contribute much towards shareholders wealth maximization, factor analysis has been done. The results of the study showed that out of the eight variables, three factors have been extracted and these three factors put together explain 69.902 per cent of the total variance. Further, sales and profit after tax are found to have a stronger relationship with EVA. Key Words Economic value added, Factor analysis, Shareholders wealth, Value based management and Market value added 1. Introduction Corporate performance measurement is one of the emerging areas of research in finance among the researchers all over the world. Several studies are carried to find out what influences the share price (market price) of a company. Corporate performance is affected by various factors ranging from company specific, industry specific and economic variables. For long, there had been wide acceptance on the objective of the firm to maximize the value or wealth maximization. While the principle that fundamental objective of the business concerns is to increase the value of its shareholder’s investment is widely accepted, there is substantially less agreement about how this is accomplished (Rappaport, 1986). As the lenders (debt and others), can protect themselves contractually, the objective can be narrowed down to maximizing stockholders value or stockholders wealth. When financial markets are efficient, the objective of maximizing stockholder wealth can be narrowed even further – to maximizing stock prices (Damodaran, 1996). Even through stock price maximization as an objective is the narrowest of the value maximization objectives, it is the most prevalent one. It is argued that the stock prices are the most observable of all measures that can be used to judge the performance of a publicly traded firm. Besides this, the stock price is a real measure of stockholder wealth, since stockholders can sell their stock and receive the price now. While the responsibility of firm value maximization has to be fixed with the managers, using stock prices as a measure of periodic measure of corporate performance throws a serious problem. While many argue that the stock prices are not under the full control of the managers, there are many others who believe that stock price maximization leads to a short-term focus for manager-as the stock prices are determined by traders, short-term investors and analysts, all of whom hold the stock for short-periods and spend their time trying to forecast next quarter’s earnings. According to Rappaport (1986), within a business, there are seven drivers (sales growth rate, operating profit margin, income tax rate, working capital investment, fixed capital investment, cost of