Paper 9 (Evidence on EVA - Claim #1 - EVA better explains stock returns and firm values

5 important questions on Paper 9 (Evidence on EVA - Claim #1 - EVA better explains stock returns and firm values

Do EVA and/or RI dominate earnings (NI) and operating cash flow (CFO) in explaining contemporaneous stock returns?

The results do not support the claims that EVA dominates earnings in its association with stock returns. NI appears to outperform EVA on average.

Do components unique to EVA or RI help explain  contemporaneous stock returns beyond that explained by CFO and NI?

EVA components add little to the explanatory power of the regressions. Further, tests across alternative specifications indicate that, while traditional earnings components such as operating cash flow and accruals are consistently significant, components unique to EVA - that is, the capital charge and accounting adjustments - are often not significant in explaining contemporaneous returns.

What does the figure with associations between contemporaneous stock returns and EVA, residual income, accounting earnings and operating cash flow show?

Neither EVA nor RI appears to dominate NI in its association with stock market returns. NI has the largest relative information content and the overlap between circles is large, suggesting that there is little incremental information content in EVA, RI, and CFO beyond that contained in NI.
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Does EVA dominate earnings in explaining firm values?

The results do not support contention that EVA outperforms earnings in explaining firm values. On the contrary, our evidence suggests that earnings more often dominates EVA in value-relevance to market participants.

Why don't residual income and EVA beat earnings?

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