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An Empirical Examination of Negative Economic Value Added Firms

Author

Listed:
  • Stoyu I. Ivanov
  • Kenneth Leong
  • Janis K. Zaima

Abstract

Economic value-added or EVA is a common metric that quantifies the value of the firm. However, recent studies that examine portfolio investment strategies using EVA suggest that portfolios formed with negative EVA earn relatively higher returns compared to some positive EVA firms. This study investigates whether firms with current negative EVAs perform well in the future. A sample of firms with negative EVAs in 2003 is identified, then four portfolios are formed by ranking firms from the most negative to the least negative EVAs. The returns of the four portfolios are tracked from 2004 through 2009 and correlated to four accounting variables, return on assets (NOPAT/TA), market-to-book ratio (MTB), leverage, and size. The results indicate that the firms with lower leverage ratio exhibit higher portfolio returns. Furthermore, firms in the categories defined as the least negative EVA and the second least negative EVA are able to turn around and generate positive abnormal returns.

Suggested Citation

  • Stoyu I. Ivanov & Kenneth Leong & Janis K. Zaima, 2014. "An Empirical Examination of Negative Economic Value Added Firms," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(1), pages 103-112.
    • Handle: RePEc:ibf:ijbfre:v:8:y:2014:i:1:p:103-112
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    References listed on IDEAS

    as
    1. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    2. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    3. Garvey, GT & Milbourn, TT, 2000. "EVA versus earnings: Does it matter which is more highly correlated with stock returns?," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 209-245.
    4. Biddle, Gary C. & Bowen, Robert M. & Wallace, James S., 1997. "Does EVA(R) beat earnings? Evidence on associations with stock returns and firm values," Journal of Accounting and Economics, Elsevier, vol. 24(3), pages 301-336, December.
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    Cited by:

    1. Cernikovaite, Migle Eleonora, 2016. "Brand value impact on company economic value evaluation model," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 11(1), pages 22-31, June.
    2. Miron Vasile Cristian Ioachim & Focsan Eleonora Ionela, 2017. "The Analysis Of The Performance Of Companies Based On The Economic Value Added," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 181-190, February.
    3. Manju Tripathi & Smita Kashiramka & P. K. Jain, 2018. "Flexibility in Measuring Corporate Financial Performance, EVA Versus Conventional Earnings Measures: Evidences from India and China," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 19(2), pages 123-138, June.

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    More about this item

    Keywords

    Economic Value Added (EVA); Market-to-Book; Portfolio Performance;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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