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

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Worthington, Andrew Charles
West, Tracey
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2001
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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 GAAPrelated 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.

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Accounting, Accountability and Performance

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7

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1

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© The Author(s) and IDEA, 2001. This is the author-manuscript version of this paper. It is posted here with permission of the copyright owner(s) for your personal use only. No further distribution permitted. For information about this journal please refer to the journal’s website or contact the author(s).

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Financial Economics

Applied Economics

Accounting, Auditing and Accountability

Banking, Finance and Investment

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