The information content of economic value-added: A comparative analysis with earnings, cash flow and residual income

Pooled 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.