Productivity Growth as the Predictor of Shareholders’ Wealth Maximization : An Empirical Investigation

The economic value added (EVA), originally developed by Stern Stewart & Company, is a relatively new financial tool that is being adopted successfully by many firms. However, evidence of EVA as a predictor of shareholders’ wealth is mixed. This paper empirically verifies the effect of productivity growth, a real missing link between EVA and a firm’s financial health, on shareholders’ wealth maximization. The study uses the firm-level data from the Indian food processing industry for the period 1993-94 to 2005-06 to measure and decompose the Malmquist productivity index into its different components, such as technological change, pure efficiency change and change in scale efficiency, by using the technique of data envelopment analysis (DEA). It further examines the linkage between different components of productivity change and market value added, an indicator of shareholders’ wealth maximization, by using fixed effect regression models. The results reveal that the negative growth in total factor productivity (TFP) change is mainly due to technological regress on the one hand and increasing inefficiencies of the firms on the other hand. The scale efficiency change is found to be the only source of TFP change in the Indian food processing industry. As expected, there exists a positive relationship between the components of TFP change and MVA. However, the technological change is found to be the only driving force of market value in the Indian food processing industry, indicating that the stock market does recognize the innovative activity undertaken by firms