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

Accounting, Accountability and Performance, 7(1), pp. 73-90 (2001)

21 Pages Posted: 4 Nov 2012

Date Written: 2001

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.

Keywords: EVA, Economic Value Added, accounting-based performance measures, pooled time-series

JEL Classification: M40

Suggested Citation

Worthington, Andrew C. and West, Tracey, The Usefulness of Economic Value-Added (EVA) and its Components in the Australian Context (2001). Accounting, Accountability and Performance, 7(1), pp. 73-90 (2001), Available at SSRN: https://ssrn.com/abstract=2169809

Andrew C. Worthington

Griffith University ( email )

170 Kessels Road
Nathan, Queensland 4111
Australia
+61 (0)7 3735 4273 (Phone)
+61 (0)7 3735 3719 (Fax)

Tracey West (Contact Author)

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
249
Abstract Views
1,552
rank
146,601
PlumX Metrics