EVA verses Traditional Accounting-based Financial Performance Measures: An Evaluation of Relative and Incremental Information Content in explaining Variation in Stock Return

Abstract

Modern value-based financial performance measures, in particular EVA, is argued by its proponents as a major improvement over the Traditional accounting-based financial performance measures on the ground that EVA is more informative than the traditional performance measures in explaining the variations in stock returns. On the contrary, a good number of other researchers argued that traditional financial performance measures are more informative in contrast to EVA. However, various empirical studies have been conducted in this regard till date but the research results are quite at odds. Thus, a modest attempt has been made to scan the information content of EVA and the traditional financial performance measures (ROA, ROCE, ROE, and EPS ) in explaining variations in stock returns that will enable to recognize that whether EVA can be a preferred financial performance measure for investors in evaluating performance of companies while designing investment strategies. Relative information content test as well as incremental information content test approach has been applied here to engulf the problem. Several hypotheses have been tested statistically in order to elucidate the findings and inferences of the study. 50 Indian firms listed in Bombay Stock Exchange for the period from 1st April 2006 to 31st March 2016 have been considered here as sample for conducting the study. Relevant statistical tools and techniques along with specific statistical test such as ‘t’ test, ‘F’ test ,Co-linearity test (VIF) and Akaike information Criterion test (AICc) have also been applied at apt places for analyzing the data used in the study. Relative information content test divulges that EVA has the greatest value-relevance as it possesses the greatest information power in explaining the variations in the stock return followed by ROA, EPS, ROE, and ROCE. Incremental information content test also discloses that EVA adds considerable illustrative power to traditional performance measures.