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Australian Evidence Concerning the Information Content of Economic Value-Added

By Andrew C. Worthington and Tracey West

Abstract

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 other commonly-used accounting-based measures. These other measures of internal and external performance include earnings, net cash flow and residual income. Three alternative formulations for pooling data are also employed in the analysis, namely, the common effects, fixed effects and random effects models, with the fixed effects approach found to be the most empirically appropriate. Relative information content tests reveal returns to be more closely associated with EVA® than residual income, earnings and net cash flow, respectively. An analysis of the components of EVA® confirms that the GAAP-related adjustments most closely associated with EVA® are significant at the margin in explaining stock returns

Topics: 140000 ECONOMICS, 150299 Banking Finance and Investment not elsewhere classified, 140304 Panel Data Analysis, VALUE, RELEVANCE, RELATIVE AND INCREMENTAL INFORMATION CONTENT, ECONOMIC, VALUE ADDED, RESIDUAL INCOME
Publisher: Australian Graduate School of Management, UNSW
Year: 2004
DOI identifier: 10.1177/031289620402900204
OAI identifier: oai:eprints.qut.edu.au:2325

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