International Journal of Social Science & Economic Research
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Title:
EXPLAINING RETURN ON EQUITY: EVA VS. ACCOUNTING EARNINGS

Authors:
Sujata Behera

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Sujata Behera
Ph.D. Scholar, Institute of Management, Nirma University, Sarkhej Gandhinagar Highway, Ahmedabad 382481, India.

MLA 8
Behera, Sujata. "EXPLAINING RETURN ON EQUITY: EVA VS. ACCOUNTING EARNINGS." Int. j. of Social Science and Economic Research, vol. 4, no. 1, Jan. 2019, pp. 142-164, ijsser.org/more2019.php?id=15. Accessed Jan. 2019.
APA
Behera, S. (2019, January). EXPLAINING RETURN ON EQUITY: EVA VS. ACCOUNTING EARNINGS. Int. j. of Social Science and Economic Research, 4(1), 142-164. Retrieved from ijsser.org/more2019.php?id=15
Chicago
Behera, Sujata. "EXPLAINING RETURN ON EQUITY: EVA VS. ACCOUNTING EARNINGS." Int. j. of Social Science and Economic Research 4, no. 1 (January 2019), 142-164. Accessed January, 2019. ijsser.org/more2019.php?id=15.

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Abstract:
This study examines whether EVA (computed with the assumptions of constant and varying required return) outperforms accounting earnings by conducting relative and incremental information content analyses. Growing popularity of EVA in India and controversial results of prior studies are the reasons of conducting this study. For better validation, this study comprises 962 and 1157 sample data years of 74 large cap and 89 mid cap Indian companies over the period of 2017-2016 through 2005-2004, respectively. Relative information content analysis reveals that earnings outperform EVA in explaining changing rate of market price of equity. Incremental information content analysis report that earnings significantly increase the explanatory ability beyond that is provided by EVA computed with either assumptions. Thus, EVA cannot replace earnings as it has been claimed by EVA proponents. However, this study also supports to implement EVA as periodic performance measure as EVA computed with either assumptions maintains significant statistical relation with changing rate of market price of equity. Further, the results of empirical study recommends to implement EVA computed with constant required return.