IDEAS home Printed from https://ideas.repec.org/a/ibf/ijbfre/v8y2014i1p103-112.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: http://www.theibfr2.com/RePEc/ibf/ijbfre/ijbfr-v8n1-2014/IJBFR-V8N1-2014-8.pdf
    Download Restriction: no
    ---><---

    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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    2. Christiane Goodfellow & Dirk Schiereck & Steffen Wippler, 2013. "Are behavioural finance equity funds a superior investment? A note on fund performance and market efficiency," Journal of Asset Management, Palgrave Macmillan, vol. 14(2), pages 111-119, April.
    3. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23(Q III), pages 36-58.
    4. Horowitz, Joel L. & Loughran, Tim & Savin, N. E., 2000. "The disappearing size effect," Research in Economics, Elsevier, vol. 54(1), pages 83-100, March.
    5. Joanna Olbryś, 2010. "Three-factor market-timing models with Fama and French’s spread variables," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 20(2), pages 91-106.
    6. Alexandros Kontonikas & Alexandros Kostakis, 2013. "On Monetary Policy and Stock Market Anomalies," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 40(7-8), pages 1009-1042, September.
    7. De Moor, Lieven & Sercu, Piet & Vanpée, Rosanne, 2010. "The plausibility of risk estimates and implied costs to international equity investments," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 623-644, September.
    8. Brav, Alon & Geczy, Christopher & Gompers, Paul A., 2000. "Is the abnormal return following equity issuances anomalous?," Journal of Financial Economics, Elsevier, vol. 56(2), pages 209-249, May.
    9. Prezas, Alexandros P. & Simonyan, Karen & Vasudevan, Gopala, 2010. "Does offshoring create value for shareholders?," Review of Financial Economics, Elsevier, vol. 19(4), pages 179-191, October.
    10. Detzel, F. Larry & Weigand, Robert A., 1998. "Explaining Persistence in Mutual Fund Performance," Financial Services Review, Elsevier, vol. 7(1), pages 45-55.
    11. Lucena, Pierre & Fugueiredo, Antonio Carlos, 2004. "Pressupostos de Eficiência de Mercado: um estudo empírico na Bovespa [Assumptions of Market Efficiency: an empirical analysis at Bovespa/Brazil]," MPRA Paper 40884, University Library of Munich, Germany.
    12. Hirshleifer, David & Kewei Hou & Teoh, Siew Hong & Yinglei Zhang, 2004. "Do investors overvalue firms with bloated balance sheets?," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 297-331, December.
    13. Fernando Rubio, 2005. "Estrategias Cuantitativas De Valor Y Retornos Por Accion De Largo," Finance 0503029, University Library of Munich, Germany.
    14. Takao Asano & Xiaojing Cai & Ryuta Sakemoto, 2023. "Time-varying ambiguity shocks and business cycles," KIER Working Papers 1094, Kyoto University, Institute of Economic Research.
    15. Ashita Agrawal & Pitabas Mohanty & Navindra Kumar Totala, 2019. "Does EVA Beat ROA and ROE in Explaining the Stock Returns in Indian Scenario? An Evidence Using Mixed Effects Panel Data Regression Model," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 44(2), pages 103-134, May.
    16. Walkshäusl, Christian, 2015. "Equity financing activities and European value-growth returns," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 27-40.
    17. Ho, Kin-Yip & An, Jiyoun, 2020. "Decomposing the value premium: The role of intangible information in the Chinese stock market," Emerging Markets Review, Elsevier, vol. 44(C).
    18. De Moor, Lieven & Sercu, Piet, 2013. "The smallest firm effect: An international study," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 129-155.
    19. Min, Byoung-Kyu & Qiu, Buhui & Roh, Tai-Yong, 2022. "What drives the dispersion anomaly?," Journal of Banking & Finance, Elsevier, vol. 138(C).
    20. Richard Mawulawoe Ahadzie & Nagaratnam Jeyasreedharan, 2024. "Higher‐order moments and asset pricing in the Australian stock market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 75-128, March.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibf:ijbfre:v:8:y:2014:i:1:p:103-112. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mercedes Jalbert (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.