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

Biddle, Gary C.; Bowen, Robert M.; Wallace, James S.

doi:10.2139/ssrn.2948

Cited by 163 publications

(284 citation statements)

References 15 publications

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“…The current competitive advantage is value-relevant, leading to higher abnormal stock market return. This is consistent with the findings of Biddle et al (1997),…”

Section: Binary Correlationsupporting

confidence: 93%

“…In large samples, the accounting return on market-based equity typically explains about 8-10% of abnormal stock market return, measured on an annual basis. Deflated abnormal earnings in terms of Stern Stewart & Co's Economic Value Added (EVA), have been found to explain about 5-6% of abnormal stock market return (Biddle et al, 1997), questioning whether EVA is superior to earnings as a performance metric. This and most succeeding studies are consistent with the hypothesis that the competitive advantage of a firm is highly relevant for explaining its abnormal stock market performance.…”

Section: Hypotheses and Test Methodologymentioning

confidence: 99%

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Evidence on competitive advantage and superior stock market performance

2010

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“…The current competitive advantage is value-relevant, leading to higher abnormal stock market return. This is consistent with the findings of Biddle et al (1997),…”

Section: Binary Correlationsupporting

confidence: 93%

Section: Hypotheses and Test Methodologymentioning

confidence: 99%

Evidence on competitive advantage and superior stock market performance

2010

View full text Add to dashboard Cite

show abstract

“…A likely explanation is that the difficulty of forecasting dividends or cash flows is greater than taking book value of equity as a starting point and then estimating the residual of future earnings less a charge for the cost of equity (Lee, 1996). However, in a related study of the association between market returns and alternative performance metrics, Biddle et al, (1997) find that mandated earnings have a higher association with equity returns compared to, in descending order, residual income, EVA and cash flow. In particular, Biddle et al, (1997: 332) conclude 'Further, while the charge for capital and Stern Stewart's adjustments for accounting 'distortions' show some marginal evidence of being incrementally important, this difference does not appear to be economically significant.'…”

Section: Introductionmentioning

confidence: 91%

“…However, in a related study of the association between market returns and alternative performance metrics, Biddle et al, (1997) find that mandated earnings have a higher association with equity returns compared to, in descending order, residual income, EVA and cash flow. In particular, Biddle et al, (1997: 332) conclude 'Further, while the charge for capital and Stern Stewart's adjustments for accounting 'distortions' show some marginal evidence of being incrementally important, this difference does not appear to be economically significant.' The finding that the capital charge has minimal value relevance is puzzling given its central role in the residual income valuation model.…”

Section: Introductionmentioning

confidence: 91%

“…A main finding in the literature on residual income is that a single-period residual income figure is not a reliable indicator of the periodic change in shareholder wealth (see, e.g., Bromwich and Walker, 1998;and O'Hanlon and Peasnell, 1998); hence a long window research design is more appropriate than a one period window. Biddle et al (1997) Biddle et al (1997) research design is, however, subject to the limitation that shareholders' return (an equity metric) is regressed on contemporaneous measures of performance that are measured at the entity (operating) level of the firm.…”

Section: Theoretical Background and Related Researchmentioning

confidence: 99%

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A Comparison of Error Rates for EVA, Residual Income, GAAP-earnings and Other Metrics Using a Long-Window Valuation Approach

Forker

Powell

2008

European Accounting Review

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Predictability and variability are two measures commonly used in the empirical literature to gauge the quality of earnings and hence, decision usefulness to investors. We adopt both measures to investigate empirically the relative quality of Stern Stewart's measure of economic value added (EVA) compared to GAAP (generally accepted accounting principles) earnings, residual income, cash flows and other mandated metrics in the USA and UK. We proxy for accounting quality by applying a long-window methodology to obtain hindsight valuation errors based on the difference between ex ante market value and discounted ex post metrics. Decision usefulness, in terms of ease of forecasting, is proxied by differences in valuation errors between the benchmark and alternative accounting methods. Contrary to the Biddle et al. (Journal of Accounting and Economics, 24, pp. 301-336, 1997) finding that mandated earnings were superior to EVA and residual income, we find that EVA and other residual income metrics consistently give rise to lower average valuation errors and thus have higher predictability across a variety of windows and terminal dates. Further, on the basis of our second measure of accounting quality, the variability of valuation errors, EVA performs best in the USA and third in the UK. The results strongly indicate that differences between residual income constructs, including EVA, are generally small but that earnings quality will be improved by recognition of a cost of equity capital in measuring reported income.

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The relationship between economic value added and the stock market performance of agribusiness firms

Turvey

Lake²,

Duren

et al. 2000

Agribusiness

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This article examines the relationship between economic value added (EVA) and the stock market performance of 17 publicly traded companies in the Canadian food processing sector. The research is motivated by the increased popularity of EVA in corporate finance and by the claims that high EVA causes incremental gains in share price values. Using1996 annual reports to compute EVA, and daily stock prices for 1994 through 1998, we attempt to correlate EVA with a variety of measures including accounting return on assets (ROA), return on equity (ROE), share price, the Capital Asset Pricing Model (CAPM) returns and risk, and others. Results find little support for the conjecture that high-EVA firms lead to higher shareholder value, however, because the management logic that has popularized EVA is so logical and fundamental to common practices in corporate finance that we resist dismissing EVA as a valued paradigm. Rather, we suggest that market volatility and other factors mask the short-run increments to shareholder wealth from EVA-implemented strategies. [EconLit citations: G30, Q13.]

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

Cited by 163 publications

References 15 publications

Evidence on competitive advantage and superior stock market performance

Evidence on competitive advantage and superior stock market performance

A Comparison of Error Rates for EVA, Residual Income, GAAP-earnings and Other Metrics Using a Long-Window Valuation Approach

The relationship between economic value added and the stock market performance of agribusiness firms

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