An Empirical Examination of Negative Economic Value Added Firms

The International Journal of Business and Finance Research, v. 8 (1) p. 103-112

10 Pages Posted: 5 Feb 2014

See all articles by Stoyu I. Ivanov

Stoyu I. Ivanov

San Jose State University

Kenneth Leong

Menlo College

Janis K. Zaima

Menlo College

Date Written: 2014

Abstract

Economic value-added or EVA is a common metric that quantifies the value of the firm. However, recent studies that examine portfolio investment strategies using EVA suggest that portfolios formed with negative EVA earn relatively higher returns compared to some positive EVA firms. This study investigates whether firms with current negative EVAs perform well in the future. A sample of firms with negative EVAs in 2003 is identified, then four portfolios are formed by ranking firms from the most negative to the least negative EVAs. The returns of the four portfolios are tracked from 2004 through 2009 and correlated to four accounting variables, return on assets (NOPAT/TA), market-to-book ratio (MTB), leverage, and size. The results indicate that the firms with lower leverage ratio exhibit higher portfolio returns. Furthermore, firms in the categories defined as the least negative EVA and the second least negative EVA are able to turn around and generate positive abnormal returns.

Keywords: Economic Value-added (EVA), Market-to-Book, Portfolio Performance

JEL Classification: G10, G11, G32

Suggested Citation

Ivanov, Stoyu I. and Leong, Kenneth and Zaima, Janis K., An Empirical Examination of Negative Economic Value Added Firms (2014). The International Journal of Business and Finance Research, v. 8 (1) p. 103-112, Available at SSRN: https://ssrn.com/abstract=2321766

Stoyu I. Ivanov (Contact Author)

San Jose State University ( email )

San Jose, CA 95192-0066
United States

Kenneth Leong

Menlo College ( email )

1000 El Camino Real
Atherton, CA 94027
United States

Janis K. Zaima

Menlo College ( email )

1000 El Camino Real
Atherton, CA 94027
United States

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