International Journal of Social Science & Economic Research
Submit Paper

Title:
EXPLAINING RETURN ON EQUITY: EVA VS. ACCOUNTING EARNINGS

Authors:
Sujata Behera

|| ||

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.

References
[1]. Abdeen ,A.M., & Haight, G.T. (2011), A Fresh Look at Economic Value Added: Empirical Study of the Fortune Five-Hundred Companies, Journal of Applied Business Research (JABR), 18(2).
[2]. Ahmed, H. (2015), Impact of Firms Earnings and Economic Value Added on the Market Share Value: An Empirical Study on the Islamic Banks in Bangladesh, Global Journal of Management and Business Research, 15(2).
[3]. Ahrendsen, B., & Khoju, M. (1994), Constant Discount Rate and Co-integration Analysis of Arkansas Farmland Prices, It has presented in the American Agricultural Economics Association Meeting, San Diego, California.
[4]. Anderson, A.; Weaver, S. C.; Bey, R. P. (2004), Economic Value Added Adjustments: Much to Do about Nothing, A Paper presented at the Midwest Finance Association Meetings, March 18-20.
[5]. Anastassis, C., & Kyriazis, D. (2007), The Validity of the Economic Value Added Approach: an Empirical Application, European Financial Management, 13(1), 71-100
[6]. Ismail, A. (2006), Is EVA associated with stock return than accounting earnings? The UK evidence. International Journal of Managerial Finance, 2(4), 343-353.
[7]. Banerjee, A. (2000), Linkage between Economic Value Added and Market Value: An Analysis, Vikalpa, 25(3), pp. 23-36.
[8]. Banerjee, A. & Jain, S. C. (1999), Measuring Performance, The Chartered Accountant, 34-40.
[9]. Bao, B. H., & Bao, D. H. (1998), Usefulness of Value Added and Abnormal Economic Earnings: An Empirical Examination, Journal of Business Finance and Accounting, 25(1- 2), 271-265.
[10]. Bardia, S. C. (2006), EVA vs. Traditional Corporate Performance Parameters: A Dialectics, Research Bulletin, ICWAI, pp 51-60.
[11]. Belsley, D.A.; Kuh, E. & Welsch, R. E. (1980), Regression Diagnostics: Identifying Influential Data and Sources of Collinearity, Wiley, New York, NY.
[12]. Bhatnagar, D.; Bhatnagar, C.; & Bhatia, B.S(2004), Measuring Financial Performance through EVA: A departure from Tradition, Appejay Journal of Management, 1(1), 16-24.
[13]. Biddle, G.C.; Bowen, R.M.; Wallace, J. S. (1997), Does EVA Beat Earnings? Evidence on Association with Stock Returns and Firm Values, Journal of Accounting and Economics 24(3), pp.301-336.
[14]. Biddle, G. C.;Bowen, R.M. &Wallace, J. S. (1999), Evidence on EVA, Journal of Applied Corporate Finance, 12(2), 69-79.
[15]. Biddle, G. C.; Bowen, R. M.; and Wallace, J, S. (1998), Economic value added: Some empirical Evidence, Managerial Finance Patrington, Vol.24, Issue.11.
[16]. Biddle, G. C.; Bowen, R. M.; Wallace, J. S.; & Bay K (1997), Does EVA beat earnings? Evidence on associations with stock returns and Firm values, Journal of Accounting and Economics, Volume 24, Issue 3, pp.301-336.
[17]. Biddle, G.C.; Seow, G. S.; and Siegel, A. F.(1995), "Relative versus Incremental Information Content"Contemporary Accounting Research, Vol.12, No.1, pp.1-23
[18]. Cates, D. C.(1997), Performance Measrement: Welcome to the Revolution, Banking Strategies, 51.
[19]. Chamberlain, K. & Campbell, R. (1995), Creating Shareholder Value. New Zealand Manufacture, Vol. 100, No. 2.15.
[20]. Chamberlain, J. & Mei, J. (1993), Where Do Betas Come From?-Asset Price Dynamica and the Sources of Systematic Risk. Review of Financial Studies 6, 567-592.
[21]. Chen, S. & Dodd, J. L. (1997), Economic value added (EVA): An empirical examination of a new corporate performance measure, Journal of Managerial Issues, 318-333.
[22]. De Villiers, J. & Auret, C. J. (1998) A Comparison of EPS and EVA as Explanatory Variables for Share Price. Studies in Economics and Econometrics, 22(2), pp. 47-63.
[23]. Easton, P.D.; Harris, T. S. (1992), Earnings as an Explanatory Variable for Returnss, Journal of Accounting Research, 29(1), pp. 19-36.
[24]. Fama, E.F.& French, K.R.(1988), Permanent and Temporary Components of Stock Prices, Journal of Political Economy, 96: 246-273.
[25]. Feldstein, M. (1983), Inflation and Stock Market. URL:http://www.nber.org/chapters/c11335, p.186-198
[26]. Gift, M. J.; & Yang, Ye. Q. (2010), Financial Market Reactions to Earnings Announcements and Earnings Forecast Revisions: Evidence from the U.S and China, The International Journal of Business and Finance Research, Vol. 4. No.2
[27]. Goetzmann, W. N. & Garstka, S. J. (1999), The Development of Corporate Performance Measure: Benchmarks Before EVATM, Yale ICF Working Paper, 99-06, July 12, New Haven: Yale School of Management.
[28]. Grant, J. (2003), Foundations of Economic Value Added, Wiley, Hoboken, NJ.
[29]. Hodrock, R.1.(1992), Dividend Yeilds and Expected Stock Returns: Alternative Procedures for Inference and Measurement ,Review of Financial Studies 5, 357-386. 30Kramer, J. K. & Pushner, G. (1997), An Empirical Analysis of Economic Value Added as a Proxy for Market Value Added, Financial Practice and Education, 7(1), PP. 41-49.
[31]. Keim,D.B.; Stambaugh, R.F.(1986). Predicting Returns in the Stock and Bond Markets. Journal of Finance Economics 17, 357-390.
[32]. Kim, G. W., 2006. Journal of Hospitality & Tourism Research, Vol. 30, No.1, February2006, 34-49.
[33]. Kumar, S. & Sharma, A. (2011), Association of EVA and Accounting Earnings with Market Value: Evidence from India, Asia Pacific Journal of Business Administration, Vol. 3, pp.83-96.
[34]. Lefkowitz, S. D. (1999), The Correlation between EVA and MVA of companies, MBA Dissertation, California State University.
[35]. Lehn, K. & Makhija, A. K.(1996) EVA and MVA as Performance Measures and Signals for Strategic Change. Strategic and Leadership, 24, pp. 34-38.
[36]. Lehn, K. & Makhija, A. K. (1997), EVA, Accounting Profits, and CEO Turnover: An Empirical Examination, 1985-1994, Journal of Applied Corporate Finance, 10(2), pp. 90- 97.
[37]. Mangala, D. & Joura, S. (2002), Linkage between Economic Value Added and Market Value: An Analysis in India Context, Indian Management Studies Journal, June 2002, pp.55-65.
[38]. Mcintyre, E. .V(1999), Accounting Choices and EVA. Business Horizons, 42(1), 66-72.
[39]. McLemore, P.; Woodward, G.; & Zwirlein, T. (2015), Back-tests of the Dividend Discount Model Using Time-Varying Cost of Capital, Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 25, No. 2, 2015.
[40]. Mei, J.; Lee, A.(1994), Is There a Real Estate Risk Factor Premium? Journal of Real Estate Finance and Economics 8, 115-135.
[41]. Misra, A.; Kanwal, A. (2007), Linkages between Economic Value Added and Share Prices: An Empirical Study of Indian Corporate Sector, ICFAI University Journal of Industrial Economics, II (4), 30-37.
[42]. Mittal, R.; Sinha, N.; & Singh, A. (2008), An Analysis of the Linkage between Economic Value Added and Corporate Social Responsibility, Management Decision, 46(9), 1437- 1443.
[43]. Miller, M.;& Modigliani, F. (1961), Dividend Policy, Growth and the Valuation of Shares, Journal of Business, 34(4), pp. 411-433.
[44]. O' Byrne, S. F. (1996) EVA and Market Value. Journal of Applied Corporate Finance, 9(1), 116-126.
[45]. Peterson, P. P. & Peterson, D. R. (1996) Company Performance and Measures of Value Added, Charlottesville. The research Foundation of the Institute of Chartered Financial Analysis.
[46]. Poornima, B.G.; Narayan, P.; Reddy, Y.V. (2015), Economic Value Added as an Emerging Tool of Performance Management: Evidence from Indian Companies, IUP Journal of Accounting Research & Auditing Practices, 14(3), 38.
[47]. Ramadan, I. Z. (2016), EVA and the Impact of Microeconomic Variables: Evidence from the Jordanian Manufacturing Companies, Asian Journal of Finance Accounting, 8(1), 13- 22.
[48]. Ramana, D.V.(2005), Market Value Added and Economic Value Added: Empirical Evidence from Indian Market, Xavier Institute of Management, Bhubaneswar, PP. 1-15.
[49]. Saha, A., & Malkiel, B. (2012), Valuation of Cash Flows with Time-Varying Cessation Risk. Journal of Business Valuation and Economic Loss Analysis, 7(1), pp. -. Retrieved 7 Dec. 2017, from doi: 10.1515/1932-9156.
[50]. Shubita, M. F. (2013), Information Content of Economic Value Added and Residual Income- Evidence from Jordan, Journal of Economics and Sustainable Development, Vol. 4, No. 13, 2013.
[51]. Singh, T., & Mehta, S. (2012), EVA vs. Traditional Accounting Measures: A Prerecession Case Study of Selected IT Companies, International Journal of Marketing and Technology, 2(6), 95-120.
[52]. Sehrawat, M. (2009), EVA and Performance Measurement, Deep and Deep Publication Pvt. Ltd., New Delhi, pp. 139-140.
[53]. Stewart, G. B.(1991), The Quest for Value: A Guide for Senior Managers, First Ed., New York: Harper Business.
[54]. Stewart, G. B. (1994), EVA: Fact and Fantasy. Journal of Applied Corporate Finance, 7(2), 71-84.
[55]. Turvey, C. G., & Sparling, D. (2003), Further Thoughts on the Relationship between Economic Value Added and Stock Market Performance, Agribusiness, 19(2), pp. 255- 267
[56]. Turvey, C. G.; Lake, L.; Duren, E. V.; Sparling, D. (2000), The Relationship between Economic Value Added and the Stock Market Performance of Agribusiness Firms, Agribusiness, Wiley Periodicals Inc., Vol.16, Issue.4, pp. 399-416.
[57]. Turvey, C. G.; Meilke, K.; Weersink, A.; Clark, S.; Klein, K.; & Sarker, R. (1995), Measuring the capitalization of income transfer programs into agricultural asset values, Agriculture Canada Technical Report #4-95.
[58]. Venkateshwarlu, M. & Kumar, N. (2004) Value Creation in Indian Enterprises: An Empirical Analysis. The ICFAI.
[59]. Warr, S.R.(2005), An Empirical Study of Inflation Distortions to EVA. Journal of Economics and Business 57, pp. 119-137Journal of Applied Finance, 10(12), 18-31.
[60]. Worthington, A. C., & West, T. (2004) Australian Evidence Concerning the Information Content of Economic Value-Added, Australian Journal of Management, 29(2), pp. 201- 224.

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.

IJSSER is Member of