Many studies have been conducted in the last two decades to answer questions such as whether it is really better
to use modern value based measures than the traditional performance measures to gauge corporate financial
performance, or which performance measure best explains corporations’ change in market value. While there have
been quite a few successful EVA stories are to encourage the EVA users, evidence supporting the rhetoric has
been primarily anecdotal. There has not been sufficient empirical research to substantiate the claim that EVA is the
best performance measure in terms of value relevance. This study is basically motivated by the claims cited above
including the interest in EVA in the business press, increasing use of EVA by firms, increasing interest in EVA
among academics and potential interest in EVA among accounting policy makers. We have tried to provide
independent empirical evidence on the information content of EVA and two mandated performance measures like
earnings and operating cash flow.
The first part of analysis uses pooled time series, cross sectional data of 34 listed Indian Banks during the period
2—1-2010 to evaluate the usefulness of EVA and other accounting based performance measures. The relative
information content indicate that over this period EVA explains some 27 per cent of variation in stock return which
is the maximum compared with the other mandated performance measures in our study. Notwithstanding the obvious
importance of earnings figures in value relevance studies, EVA is significant at the margin in explaining variation in
stock returns. This would support the potential usefulness of EVA type measures for internal and external performance
measures.
In the second part of the analysis, the components of EVA are specified as explanatory variables in regression with
excess returns. When examining components of EVA (which are shared with closely related performance measures)
the after tax interest was found to be the most significant component in explaining stock returns. This was followed
by CFO and accruals respectively. However, the capital charge was found to have the least information content.

Click here to download

w Ali, A. & Pope, P.F. 1995, ‘The incremental information
content of earnings, funds flow and cash flow: The
UK evidence’, Journal of Business Finance and
Accounting, vol. 22, no. 1, pp. 19–34.
w Anonymous, 1993, ‘The real key to creating wealth’,
Fortune, vol. 128, no. 6, pp. 38–43.
w Bao, B-H. & Bao, D-H. 1998, ‘Usefulness of value
added and abnormal economic earnings: An empirical
examination’, Journal of Business Finance and
Accounting, vol. 25, no. 1–2, pp. 251–65.
w Bacidore, J., Boquist, J., Milbourn, T. and Thakor, A.
(1997) The search for the best financial performance
measure. Financial Analysts Journal 53: 11–20.
w Biddle, G., Seow, G., 1991, “The estimation and
determinants of association between returns and
earnings: Evidence from cross industry comparisons”,
Journal of Accounting Auditing and Finance, 6, 183-232
w Biddle, G., Seow, G., Siegel, A.1995, “Relative
Versus Incremental Information Content”,
Contemporary Accounting Research, 12, 1-23
w Biddle, G. C., Bowen, M. R. & Wallace, J.S. (1999).
Evidence on EVA. Journal of Applied Corporate
Finance, 12(2), 69-79.
w Bowen, R.M., Burgstahler, D. & Daley, L.A. 1987,
‘The incremental information content of accrual versus
cash flows’, The Accounting Review, vol. 62, no. 4,
pp. 723–47.
w Chenn, S., and Dodd, J.L., 1997, “Economic Value
Added (EVA): An Empirical Examination of a New
Corporate Performance Measure”, Journal of
Managerial Issues, 9, 318-33
w Chenn, S., and Dodd, J.L., 2001, “Operating Income,
Residual Income and EVA: Which Metric is More
Relevant?”, Journal of Managerial Issues, 13, 65-86
w Drucker, P. 1991, ‘The new productivity challenge’,
Harvard Business Review, vol. 69, no. 6, pp. 69–79.
w Easton, P.D. & Harris, T.S. 1991, ‘Earnings as an
explanatory variable for returns’, Journal of
Accounting Research, vol. 29, no. 1, pp. 19–36.
w Ehrbar, A. (1998), Economic Value Added: The Real
Key to Creating Wealth, New York: John Wiley &
Sons, Inc.
w Erasmus, P.D. (2008), “The Relative and Incremental
Information Content of the Value Based Financial
Performance Measure Cash Value Added (CVA)”,
Management Dynamics, Vol.17, No. 1, pp.2-15.