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The Usefulness of Economic Value-Added (EVA®) and its Components in the Australian Context

By Andrew C. Worthington and Tracey A. West

Abstract

In this study, pooled time-series, cross-sectional data on 110 Australian companies over the period 1992-1998 is employed to examine whether EVA® is more highly associated with stock returns than conventional accounting-based measures: namely, earnings before extraordinary items, net cash flow from operations and residual income. A related empirical question concerns those components unique to EVA® that help explain these stock returns beyond that explained by other accounting-based measures. The five components of EVA® examined are net cash flows, operating accruals, after-tax interest, and cost of capital and accounting adjustments. Relative information content tests reveal returns to be more closely associated with earnings than residual income, net cash flow 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 accounting adjustments most closely associated with EVA® add more explanatory power to net cash flow than accruals or after-tax interest, though these measures are relatively more significant alone in explaining market returns

Topics: 150299 Banking Finance and Investment not elsewhere classified, 150199 Accounting Auditing and Accountability not elsewhere classified, Economic value, added, residual income, cash flow, information content
Publisher: Griffith Business School Department of Accounting, Finance & Economics
Year: 2001
OAI identifier: oai:eprints.qut.edu.au:2570

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