Economic Value Added (EVA®) and Sector Returns

Abstract

Prior studies show that Economic Value Added (EVA®) contributes little information content beyond earnings in explaining individual stock returns. Such findings might be attributed to the idiosyncratic measurement error of EVA in an individual company. We revisit the benefits of EVA by comparing its information content in explaining 90 sector returns with the information content of three traditional accounting-based performance measures: cash flow from operations (CFO), earnings (EBIT), and residual income (RI). Our findings show that the association between traditional accounting performance measures and sector returns is higher than that with EVA. Further investigation on which components of EVA contribute most toward the association of EVA with sector returns shows that operating accruals and operating cash flows provide information content beyond that provided by components that are unique to EVA such as capital charge.