Does Eva Beat Earnings? Evidence on Associations with Stock Returns and Firm Values

This study tests assertions that Economic Value Added (EVA®) is more highly associated with stock returns and firm values than accrual earnings, and evaluates which components of EVA, if any, contribute to these associations. Relative information content tests reveal earnings to be more highly associated with returns and firm values than EVA, residual income, or cash flow from operations. Incremental tests suggest that EVA components add only marginally to information content beyond earnings. Considered together, these results do not support claims that EVA dominates earnings in relative information content, and suggest rather that earnings generally outperforms EVA.

[1]  Ilia D. Dichev,et al.  Earnings, Adaptation, and Equity Value , 1996 .

[2]  K. Peasnell,et al.  SOME FORMAL CONNECTIONS BETWEEN ECONOMIC VALUES AND YIELDS AND ACCOUNTING NUMBERS , 1982 .

[3]  Carla K. Hayn.  The information content of losses , 1995 .

[4]  G. Stewart.  EVA™: FAST AND FANTASY , 1994 .

[5]  J. MacKinnon,et al.  Estimation and inference in econometrics , 1994 .

[6]  John B. Canning.  The economics of accountancy : a critical analysis of accounting theory , 1929 .

[7]  E. Edwards,et al.  The Theory and Measurement of Business Income , 1961 .

[8]  Gary C. Biddle,et al.  The Estimation and Determinants of Associations between Returns and Earnings: Evidence from Cross-Industry Comparisons , 1991 .

[9]  James S. Wallace.  Adopting Residual Income-Based Compensation Plans: Evidence of Effects on Management Actions , 1997 .

[10]  Gary C. Biddle,et al.  Relative Versus Incremental Information Content , 1995 .

[11]  David Solomons,et al.  Divisional Performance: Measurement and Control , 1983 .

[12]  M. Robert,et al.  THE INCREMENTAL INFORMATION CONTENT OF ACCRUAL VERSUS CASH FLOWS , 1987 .

[13]  Daniel W. Collins,et al.  Equity Valuation and Negative Earnings: The Role of Book Value of Equity , 1999 .

[14]  Stanley Zarowin,et al.  The Future of Finance , 1995 .

[15]  W. R. Gregory,et al.  Earnings Volatility , Earnings Management , and Equity Value , 1997 .

[16]  Gabriel A. D. Preinreich.  Annual Survey of Economic Theory: The Theory of Depreciation , 1938 .

[17]  D. Collins,et al.  Accounting information and corporate governance: Market and analyst reactions to earnings of firms engaged in proxy contests , 1990 .

[18]  Irwin Ross.  THE STERN STEWART PERFORMANCE 1000 , 1996 .

[19]  Gerald A. Feltham,et al.  Valuation and Clean Surplus Accounting for Operating and Financial Activities , 1995 .

[20]  A. Marshall.  Principles of Economics , .

[21]  James A. Ohlson.  Earnings, Book Values, and Dividends in Equity Valuation* , 1995 .

[22]  L. Daley,et al.  EVIDENCE ON THE RELATIONSHIPS BETWEEN EARNINGS AND VARIOUS CASH FLOW MEASURES , 1986 .

[23]  Stephen F. O'Byrne.  EVA® AND MARKET VALUE , 1996 .

[24]  L. Walbert.  THE STERN STEWART PERFORMANCE 1000: USING EVA™ TO BUILD MARKET VALUE , 1994 .

[25]  Peter E. Kennedy.  A Guide to Econometrics , 1979 .

[26]  Peter Easton,et al.  EARNINGS AS AN EXPLANATORY VARIABLE FOR RETURNS , 1991 .

[27]  Marilyn F. Johnson,et al.  Informational efficiency and the information content of earnings during the market crash of October 1987 , 1989 .

[28]  Q. Vuong.  Likelihood Ratio Tests for Model Selection and Non-Nested Hypotheses , 1989 .

[29]  K. R. Subramanyam,et al.  The pricing of discretionary accruals , 1996 .

[30]  Al Ehrbar,et al.  EVA: The Real Key to Creating Wealth , 1998 .

[31]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[32]  James S. Wallace.  Adopting residual income-based compensation plans: Do you get what you pay for? , 1997 .

[33]  K. Peasnell,et al.  On Capital Budgeting And Income Measurement , 1981 .

[34]  J. Kay,et al.  ACCOUNTANTS, TOO, COULD BE HAPPY IN A GOLDEN AGE: THE ACCOUNTANTS RATE OF PROFIT AND THE INTERNAL RATE OF RETURN , 1976 .

[35]  H. Hotelling.  The Selection of Variates for Use in Prediction with Some Comments on the General Problem of Nuisance Parameters , 1940 .