The sample is drawn from all exchange-listed firms in top six world economic markets(USA、Japan、Germany、United Kingdom、France、China), and exclude banks and financial firms(those with SIC code from 6000 to 6999) during the 5-year period, from 2003 to 2007. There are 28,765 observations of the top six world economic markets.
Table 1 shows the top six world economic markets’ GDP data over 2003-2007. This paper want to investigate whether EPS or FCF which reflect firm value better and add corporate governance to inspect. For global perspective purpose, we choose the top six world economic markets bases on GDP to study.
Panel A shows the rank of top six economic markets bases on GDP over the sample period 2003-2007. The data come from IMD World Competitiveness Online Database, and the database collect the world wield annual GDP data from World Bank. From 2003 to 2007, USA is the world top 1 economic market of the world, and its GDP is almost three times as high as the world top 2 economic market, ranges from 10960.80 billion dollars to 13807.60 billion dollars; Japan is the world top 2 economic market, ranges from 4230.32 billion dollars to 4380.51 billion dollars; The world top 3 economic market, Germany, ranges from 2442.21 billion dollars to 3316.32 billion dollars; UK, France, and China their ranks changes between fourth and sixth.
Panel B provides the sum of top six economic markets' GDP to sum of all countries' GDP in the world. There are 57 world main countries’ GDP data that IMD World
Competitiveness Online Database is collected. The row of panel B named Total_six means sum of top six economic markets' GDP in each year, and the row of panel B named Total_world means sum of 57 world main countries’ GDP in each year. As can be seen from the last row of panel B, sum of top six economic markets' GDP are almost above 60% of sum of the countries’ GDP in the world. Therefore, top six economic markets can be a proxy of the whole world.
[Insert Table 1 here]
The firm-level accounting data, e.g., book value of asset, book value of liability, market value of equity, earning per share, free cash flow per share, and debt to equity ratio. These data come from Compustat Global Vantage that provides fundamental financial and price data for both active and inactive publicly traded companies, and it goes back annually to 1950, and Global Vantage goes back to 1993.
The country-level corporate governance data, e.g., role of law, shareholder's right, and corporate boards measures. The three variables come from IMD World Competitiveness Online that provides a worldwide reference point on the competitiveness of nations, ranking and analyzing how an economy creates and sustains the competitiveness of enterprises. These indexes form IMD World Competitiveness Online all be scored from 0 to 10. In addition, we obtain Corruption measures for each country form Transparency International. Transparency International is a global civil society organization. They provide Corruption Perceptions Index (CPI), first released in 1995, is the best known of TI’s tools. The Corruption Perceptions Index is also score from 0 to 10. We further obtain the Country risk measures for each country form Euromoney. Euromoney is a magazine that reports international banking finance and capital markets news, analysis, and issues country risk ranking every September.
2.2 Variable definitions
All the financial statement variables are firm-level data, and the corporate governance variables are country-level data. The variables are defined as follows:
[Insert Table 2 here]
In Table 3, we present the descriptive statistics on entire samples of variables. All the variables are averaged of the sample period on each country, and the data come from Compustat. The market value of equity, book value of debt and book value of assets are reported in millions of dollars, averaged over 2003 though 2007. The market value of equity of USA, UK and France are higher than average of the six countries samples (Total4); the book value of debt of Germany, France and USA are higher than all the countries average; the book value of assets of Germany, France and USA are higher than all the countries average.
Klapper (2004) and Wright et al. (2009) use Tobin’ Q and ROA as firm performance, ROA is accounting-based and Tobin’s Q is market-based. There are two counties’ Tobin’ Q, USA and China, higher than the total average; and there are four counties’ ROA higher or equal to the total average, they are USA, UK, France and China.
The financial statement variables contain EPS, FCF and Leverage, and these data also come from Compustat. USA, France and Germany have larger period average EPS and FCF than the Total average. In order to measure the corporate performance the EPS will be scaled by stock price from the beginning of the year (Warfield, Wild and Wild, 1995; Gabrielsen, Gramlich and Plengborg, 2002; Korczak and Korczak, 2009), so we do the same for FCF.
Except USA and Germany, the other countries’ scaled EPS are more than the six countries samples average. For scaled FCF, excluding Germany and china, the other counties have larger value than Total. We use debt to equity ratio as leverage, and compared to 0.35, the
4 All the value of variables in “Total” means the average of the top six world economic markets’ samples value.
average of those countries, USA and France have higher leverage.
We have five country-level corporate governance measures. The first is Corporate Board, which is an index from IMD World Competitiveness Online to represent the degree of the board supervise the management of companies efficiency. USA, UK and China are more efficient than the other countries. The second is corruption, which is an index form Transparency International. The index is between zero to ten, lower score means higher corruption. China is the most corrupt country in the six economic markets, the corruption index of the other countries are higher than the total samples average, 7.21. The third is country risk, which is an index come from Euromoney, and the index is from zero to ten. The higher the score, the lower of country risk. China also is the highest country risk country of all the six. The fourth is rule of law, which is the legal and regulatory framework index from IMD World Competitiveness Online. USA and China are the higher legal countries, their value are larger than the total six countries average, 4.99. The fifth is shareholder’s right, which is the index formed by IMD World Competitiveness Online. Japan and China have lower period average score than the total sample average, 6.19, so these two countries have lower shareholder’s right than the others.
[Insert Table 3 here]
2.3 Models
Our study proceeds in three parts. In the first part of this paper, we use panel regression to investigate both the effects of EPS and FCF on firm performance with control variables in each country and total samples. There are two proxies of firm performance, ln(Tobin’s Q) and ROA. Tobin’s Q is a market-based firm performance; and ROA is an accounting-based firm performance. We also investigate the relationship between EPS, FCF, growth and firm performance. EPS will be scaled by stock price from the beginning of the year for measuring
firm performance (Warfield et al., 1995; Gabrielsen et al., 2002; Korczak et al., 2009), and we do the same on FCF. When a firm at high-growth, it will need to investment so capital expense will increase that FCF will decrease. Therefore, this study uses P/E ratio to separate low and high-growth opportunities firms to do group analysis. The 1/3 of all sample high P/E firms defined as high-growth opportunities firms; 1/3 of all sample low P/E firms defined as low-growth opportunities firms.
With both EPS and FCF are positive and significant with firm ROA, so the second part of this paper wants to examine do the explanatory powers of EPS and FCF on valuing firm performance as firm ROA have difference? For this purpose, EPS and FCF are set up as a competing model to explain firm ROA. This paper use a recent development in model selection techniques, previous studies (Dechow, 1994; Brown and Sivakumar 2003; Shuto, 2007) also use the method is provided by Vuong (1989). Vuong’s Z- statistic could compare the explanatory power of EPS and FCF on firm performance. The positive and significant Z- statistic indicates that the first model is the model of choice, because the residuals of the second model are larger than the first model. This indicated that EPS has a significantly larger adjusted R-square.
The third part of this paper, we investigate the relationship between EPS, FCF, corporate governance factors, and firm performance by using panel regression. The results in first part of the paper shows the effect on market-based firm performance is different between countries, so we argue that despite accounting data factors, corporate governance factors between countries may affect firm performance. Therefore, we add the country-level corporate governance factors, like corporate board, corruption, country risk, rule of law and shareholder’s right to discuss.