Abstract

http://ssrn.com/abstract=1122188
 
 

References (31)



 


 



A Comparison of Error Rates for EVA, Residual Income, GAAP-Earnings, and Other Metrics Using a Long-Window Valuation Approach


John Forker


Queen's University Management School

Ronan Powell


Dublin City University; Centre for International Finance and Regulation (CIFR); University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)



Abstract:     
Predictability and variability are two measures commonly used in the empirical literature to gauge the quality of earnings and hence, decision usefulness to investors. We adopt both measures to investigate empirically the relative quality of Stern Stewart's measure of economic value added (EVA) compared to GAAP earnings, residual income, cash flows and other mandated metrics in the US and UK. We proxy for accounting quality by applying a long-window methodology to obtain hindsight valuation errors based on the difference between ex ante market value and discounted ex post metrics. Decision usefulness, in terms of ease of forecasting, is proxied by differences in valuation errors between the benchmark and alternative accounting methods. Contrary to the Biddle, Bowen and Wallace (1997) finding that mandated earnings were superior to EVA and residual income, we find that EVA and other residual income metrics consistently give rise to lower average valuation errors and thus have higher predictability across a variety of windows and terminal dates. Further, on the basis of our second measure of accounting quality, the variability of valuation errors, EVA performs best in the US and third in the UK. The results strongly indicate that differences between residual income constructs, including EVA, are generally small but that earnings quality will be improved by recognition of a cost of equity capital in measuring reported income.

Number of Pages in PDF File: 39

Keywords: valuation errors, residual income, EVA, MVA, GAAP, IASB

JEL Classification: G14, M41

working papers series


Download This Paper

Date posted: April 19, 2008  

Suggested Citation

Forker, John and Powell, Ronan, A Comparison of Error Rates for EVA, Residual Income, GAAP-Earnings, and Other Metrics Using a Long-Window Valuation Approach. Available at SSRN: http://ssrn.com/abstract=1122188 or http://dx.doi.org/10.2139/ssrn.1122188

Contact Information

John Forker
Queen's University Management School ( email )
25 University Square
Belfast, Northern Ireland BT7 1NN
Northern Ireland
Ronan G. Powell (Contact Author)
Dublin City University ( email )
Ireland 9
Dublin 9, leinster 9
Ireland
Centre for International Finance and Regulation (CIFR) ( email )
Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

University of New South Wales (UNSW) - School of Banking and Finance ( email )
Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Feedback to SSRN


Paper statistics
Abstract Views: 1,427
Downloads: 435
Download Rank: 35,897
References:  31

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.265 seconds