Modelling traditional accounting and modern value‐based performance measures to explain stock market returns in the Athens Stock Exchange (ASE)

Abstract

Purpose -The purpose of this paper is to investigate the explanatory power of two value-based performance measurement models, Economic Value Added (EVA w ) and shareholder value added (SVA), compared with three traditional accounting performance measures: earnings per share (EPS), return on investment (ROI), and return on equity (ROE), in explaining stock market returns in the Athens Stock Exchange (ASE). Design/methodology/approach -The paper uses the Easton and Harris formal valuation model and employs both a relative and an incremental information content approach to examine which performance measure best explains stock market returns; and the explanatory power of the pairwise combinations of one value-based performance measurement model and one traditional accounting performance measure in explaining stock market returns. For this purpose, pooled time-series, cross-sectional data of listed companies in the Athens Stock Exchange (ASE) over the period 1992-2001 have been collected and modelled. Findings -Relative information content tests reveal that stock market returns are more closely associated with EPS than with EVA w or other performance measures. However, incremental information content tests suggest that the pairwise combination of EVA w with EPS increases significantly the explanatory power in explaining stock market returns. Practical implications -The results suggest that the market participants in the Greek stock market should pay additional attention to EVA w but they should also consider other determinants to develop their investment strategies. Originality/value -The paper is one of the first studies on the value relevance of traditional accounting (EPS, ROI, and ROE) and value-based (EVA w and SVA) performance measures in explaining stock market returns in the ASE. The results extend the understanding of the role of EVA w and SVA in explaining stock market returns in the ASE, and, moreover, whether they may affect investors' decisions in a continental European market with market characteristics similar to that of Greece.

Industry-specific determinants of shareholder value creation

“…Studies which found economic-based measures to be more useful rather than accounting-based variables included studies by Stewart (1991Stewart ( , 1994, Stern (1993), Milunovich and Tsuei (1996), O'Byrne (1996), Bacidore et al (1997), Dodd (1997, 2001), Hall (1999), Worthington and West (2004), Chmelikova (2008) and Lee and Kim (2009). By contrast, studies by Biddle et al (1997), Salvaiy (1997), Bao and Bao (1998), De Villiers and Auret (1998), De Wet (2005, Ismail (2006), Maditinos et al (2006Maditinos et al ( , 2009, Kyriazis and Anastassis (2007), Erasmus (2008), Kumar and Sharma (2011), Arabsalehi and Mahmoodi (2012), Abdoli et al (2012), Mollah et al (2012), Hall (2013) and Alloy Niresh and Alfred (2014) found that accounting-based variables performed better in explaining shareholder value creation than economic-based measures. It falls beyond the scope of this study to discuss the results of the abovementioned studies in more detail, but it is important to point out that the inconsistencies of their results may lead managers, investors, shareholders and researchers to ask the following questions:…”

Is EVA an Effective Performance Measure; Evidence from Colombo Stock Exchange, Sri Lanka

“…There are numerous studies that have argued that EVA is not superior to other measures and even it is not a significant performance measure to be considered in decision making. Dodd (1997, 1998); Biddle, Bowen and Wallace (1997); Worthington and West (2001); Kim (2006);Ismail (2006) and Maditinos, Sevic and Theriou (2009) have reported that though EVA shows a relationship with return, the EVA is not a superior performance measure as argued by Stewart (1991) . Some other researchers (Peterson and Peterson, (1996) ;Turvey et.…”

Comparative economic value added on Southeast Asian banking industry

“…We use a model developed by Easton & Harris (1991) and has been used by many researchers such as Easton & Harris (1991), Biddle, et al (1997), Chen & Dodd (1997) and Worthington & West (2001). Easton & Harris (1991) model is a connection between stock returns, earnings levels and changes in the level of each earnings as quotes in study by Maditinos et al (2009). Based on the explanation above, the model is developed from Easton and Harris's Model to analyze the relationship between Economic Value Added (EVA) and the company's financial ratios with company's stock return based on study done by Maditinos et al (2009) and this model is also used on study by Mandilas et al (2009).…”

“…Above study is a continuation of research conducted by Maditinos, Sevic, & Theriou (2009) with the same sample but different research study period with the method developed by Easton & Harris (1991) namely relative information content and incremental information content. This study also found the same thing with the above studies is that the EPS has the greatest explanatory power on the stock return and if EVA combined with the EPS, the explanatory power of these measurements both in the stock return is greater than the explanatory power of each variable (i.e.…”