WEALTH ADDED INDEX: ITS RELATION WITH CURRENT RETURN AND FUTURE ABNORMAL RETURN

Abstract

ABSTRACT Wealth Added Index (WAI) is a popular metric to measure wealth created or destroyed in a publicly traded company. Yet research that link WAI and stock return and its potential to predict future return has been scant. WAI of forty five most liquid companies in Indonesia stock exchange in the period of February to July 2009 are calculated for periods of 2009 to 2011. A model is proposed where WAI and current stock return will indicate whether a stock is over, under, or fairly valued. The stocks performances in the following years are then measured. It is found that over (under) valued stock show lower (higher) abnormal return in the following periods. The result supports the claim that WAI is an accurate wealth creation metric, and in the process explores the possibility to use it as tool for investment decision making.