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The Usefulness of Economic Value-Added (EVA®) and its Components in the Australian Context

Worthington, Andrew C. & West, Tracey A. (2001) The Usefulness of Economic Value-Added (EVA®) and its Components in the Australian Context. Accounting, Accountability and Performance, 7(1), pp. 73-90.

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 GAAP-related 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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ID Code: 2570
Item Type: Journal Article
Additional URLs:
Keywords: Economic value, added, residual income, cash flow, information content
ISSN: 1323-711X
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > BANKING FINANCE AND INVESTMENT (150200) > Banking Finance and Investment not elsewhere classified (150299)
Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > ACCOUNTING AUDITING AND ACCOUNTABILITY (150100) > Accounting Auditing and Accountability not elsewhere classified (150199)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2001 Griffith Business School Department of Accounting, Finance & Economics
Copyright Statement: Reproduced in accordance with the copyright policy of the publisher.
Deposited On: 21 Nov 2005
Last Modified: 05 Jan 2011 23:25

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