Australian Evidence Concerning the Information Content of Economic Value-Added

26 Pages Posted: 4 Nov 2012

Date Written: 2004

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.

Keywords: value-relevance, relative and incremental information content, economic value-added, residual income

JEL Classification: M40

Suggested Citation

Worthington, Andrew C. and West, Tracey, Australian Evidence Concerning the Information Content of Economic Value-Added (2004). Australian Journal of Management, Vol. 29, No. 2, 2004, Available at SSRN: https://ssrn.com/abstract=2169811

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

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