The usefulness of economic value-added (EVA) and its components in the Australian context

Using pooled time-series, cross-sectional data on 110 Australian companies over the period 1992-1998 an examination is undertaken whether the trademarked variant of residual income known as economic value-added (or EVA) is more highly associated with stock returns than conventional accounting-based measures. The accountingbased measures of internal and external performance include earnings, net cash flow and residual income. Relative information content tests reveal earnings to be more closely associated with returns than net cash flow, residual income and EVA . However, consistent with construction of EVA-type measures, incremental information content tests suggest that EVA ® adds more explanatory power to earnings than either net cash flow and residual income. An analysis of the components of EVA ® confirms that the capital charges and GAAP-related adjustments most closely associated with EVA ® are significant at the margin in explaining market returns. JEL classification: C23; G14; M41.