A Review of the Empirical Literature on Earnings and Economic Value Added (EVA) in Explaining Stock Market Returns. Which Performance Measure is More Value Relevant in the Athens Stock Exchange (ASE)?
Dimitrios Maditinos*, Željko Šević**, and Nikolaos Theriou*
*TEI of Kavala, Greece, Department of Business Administration **University of Greenwich Business School, Department of Accounting and Finance
The aim of this study is (a) to present the empirical research to date on earnings and EVA and (b) to provide a comprehensive analysis and interpretation of the value relevance of them in explaining stock returns in the ASE. To achieve it, the relevant literature was studied and publicly available financial data of the listed companies in the ASE during 1992-2001 was collected and analysed. Earnings per Share (EPS) is a financial performance measure traditionally used by companies and analysts, while EVA is a representative measure of modern value-based performance measurement. It is defined as net operating profit after taxes less the capital employed for this operation (a capital charge). EVA has been introduced in the corporate world as the only integrated financial management system that ‘drives stock prices’ (Stewart 1991; 1999; Stern, Stewart and Chew, 1995). However, results from the empirical research to date are not consistent to this assertion. This study is stimulated by both the value-based performance measures proponents’ assertions and by the mixed empirical results for its value relevance reported until now. Pooled time-series, cross sectional data of listed companies in the ASE over the period 1992 – 2001 have been employed to examine whether EVA or earnings are associated more strongly with stock returns. Relative information content tests reveal that stock returns are more closely associated with earnings per share than with EVA while incremental information content tests suggest that EVA adds considerable explanatory...
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