The information content of economic value-added: A comparative analysis with earnings, cash flow and residual income
AbstractPooled time-series, cross-sectional data on 110 Australian companies over the period 1992-1998 is employed to examine whether the trademarked variant of residual income known as economic value-added (EVA®) is more highly associated with stock returns than more conventional accounting-based measures. These other measures of internal and external performance include earnings, net cash flow and residual income. Relative information content tests reveal returns to be more closely associated with earnings than net cash flow, residual income and EVA® respectively. However, consistent with the construction of EVA®, incremental information content tests suggest that EVA® adds more explanatory power to earnings than either net cash flow or residual income. An analysis of the components of EVA® confirms that the capital charges and GAAP-related adjustments most closely associated with EVA® are significant at the margin in explaining market returns.
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Bibliographic InfoPaper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 066.
Date of creation: 20 Sep 1999
Date of revision:
Value-relevance; relative and incremental information content; economic-value added; residual income.;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
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- Jerold L. Zimmerman, 1997. "Eva And Divisional Performance Measurement: Capturing Synergies And Other Issues," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(2), pages 98-109.
- Dennis G. Uyemura & Charles C. Kantor & Justin M. Pettit, 1996. "Eva� For Banks: Value Creation, Risk Management, And Profitability Measurement," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 94-109.
- Rogerson, William P, 1997. "Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 770-95, August.
- Kathleen Goffey & Andrew Worthington, 2002. "Motor Vehicle Usage Patterns in Australia: A Comparative Analysis of Driver, Vehicle & Purpose Characteristics for Household & Freight Travel," School of Economics and Finance Discussion Papers and Working Papers Series 117, School of Economics and Finance, Queensland University of Technology.
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