An accepted financial axiom is that the role of managers is to maximize the long terme wealth of shareholders by the efficient allocation of resources. In order to operationalize this objective, shareholder wealth is traditionally a proxy for either standard accounting procedures or financial ratios like as P/E ratio- which is broadly used by investors and analysts. Managers. shareholders and other interest parties then use this financial information to assess and examine their performance. Unfortunately one can not just rely on accounting based measures to explain changes in shareholder wealth.
A recent innovation in the field of internal performance measurement is the concept of Cash Value Added which is directly linked to the creation of shareholder value over time. This model only measures cash flow and is focused on the profitability of investment.
Pooled time- series data on 85 industrial companies of Tehran Stock Exchange over the period 1999 (1378)- 2003 (1382) is employed to examine the information content of Cash Value Added and P/E ratio.
Relative information content tests reveals Returns to be more closely associated with CVA than P/E ratio.
Incremental information content tests suggest that both of CVA and P/E ratio have explanatory power to each other.