The primary financial objective of a firm is the maximisation of its shareholders’value. A problem faced by the shareholders of a firm is that it is difficult to determinethe effect of management decisions on the future share returns of the firm.Furthermore, it may be necessary to implement certain monitoring costs to ensure thatmanagement is focused on achieving this objective. A firm would, therefore, benefitfrom being able to identify those financial performance measures that are able to linkthe financial performance of the firm to its share returns. Implementing such afinancial performance measure in the valuation and reward systems of a firm shouldensure that management is aligned with the objective of shareholder valuemaximisation, and rewarded for achieving it.A large number of traditional financial performance measures have been developed.These measures are often criticised for excluding a firm’s cost of capital, and areconsidered inappropriate to be used when evaluating value creation. Furthermore, itis argued that these measures are based on accounting information, which could bedistorted by Generally Accepted Accounting Practice (GAAP). Studies investigatingthe relationship between these measures and share returns also provide conflictingresults. As a result of the perceived limitations of traditional measures, value basedfinancial performance measures were developed. The major difference between thetraditional and value based measures is that the value based measures include a firm’scost of capital in their calculation. They also attempt to remove some of theaccounting distortions resulting from GAAP.Proponents of the value based measures present these measures as a majorimprovement over the traditional financial performance measures and report highlevels of correlation between the measures and share returns. A number of studiescontaining contradictory results have been published. On the basis of theseconflicting results it is not clear whether the value based measures are able tooutperform the traditional financial performance measures in explaining share returns.The primary objectives of this study are thus to:• Determine the relationship between the traditional measures earnings beforeextraordinary items (EBEI) and cash from operations (CFO), and shareholdervalue creation;• Investigate the value based measures residual income (RI), economic value added(EVA), cash value added (CVA) and cash flow return on investments (CFROI),and to determine their relationship with the creation of shareholder value;• Evaluate the incremental information content of the value based measures abovethe traditional measures. The information content of the traditional measures and the value based measures areevaluated by employing an approach developed by Biddle, Bowen and Wallace(1997). The first phase of this approach entails the evaluation of the relativeinformation content of the various measures in order to determine which measureexplains the largest portion of a firm’s market-adjusted share returns. The secondphase consists of an evaluation of the incremental information content of thecomponents of a measure in order to determine whether the inclusion of an additionalcomponent contributes statistically significant additional information beyond thatcontained in the other components. The study is conducted for South Africanindustrial firms listed on the Johannesburg Securities Exchange for the period 1991 to2005.The data required to calculate the measures investigated in the study are obtainedfrom the McGregor BFA database. This database contains annual standardisedfinancial statements for listed and delisted South African firms. It also contains EVA,cost of capital and invested capital amounts for those firms listed at the end of theresearch period. Including only these listed firms in the research sample wouldexpose the study to a survivorship bias. Hence these values are estimated for thosefirms that delisted during the period under review by employing a similar approach tothe one used in the database. The resulting sample consists of 364 firms providing3181 complete observations. Since different information is required to calculate thevarious measures included in the study, different samples are compiled from thisinitial sample and included in the tests conducted to evaluate the information contentof the measures.The results of this study indicate that the value based measures are not able tooutperform EBEI in the majority of the relative information content tests.Furthermore, the measures EVA, CVA and CFROI are also not able to outperform therelatively simple value based measure RI. The results from the incrementalinformation content tests indicate that although some of the components of the valuebased measures provide statistically significant incremental information content, thelevel of significance for these relatively complex adjustments is generally low.Based on these results, the claims made by the proponents of the value basedmeasures cannot be supported. Furthermore, if a firm intends to incorporate its costof capital in its financial performance measures, the measure RI provides most of thebenefits contained in the other more complex value based measures.