*Corresponding author.Tel.:(206)543-4569;fax:(206)685-9392;e-mail:rbowen @u.washing-
ton.edu
Journal of Accounting and Economics 24(1997)301—336
Does EVA beat earnings?
Evidence on associations with stock returns and
firm values叮嘱造句
Gary C.Biddle ,Robert M.Bowen *,James S.Wallace
School of Business Administration,Uni v ersity of Washington,Seattle,WA 98195-3200,USA School of Business and Management,Hong Kong Uni v ersity of Science and Technology,Clear Water
Bay,Kowloon,Hong Kong,China
Graduate School of Management,Uni v ersity of California,Ir v ine,CA 92697-3125,USA
雨后的阳光
Received 1October 1996
Abstract
This study tests asrtions that Economic Value Added (EVA )is more highly associated with stock returns and firm values than accrual earnings,and evaluates which components of EVA,if any,contribute to the associations.Relative information content tests reveal earnings to be more highly associated with returns and firm values than EVA,residual income,or cash flow from operations.Incremental tests suggest that EVA components add only marginally to information conte
nt beyond earnings.Con-sidered together,the results do not support claims that EVA dominates earnings in relative information content,and suggest rather that earnings generally outperforms EVA. 1997Elvier Science B.V.All rights rerved.
JEL classi fication:M41;G14
Keywords:Value-relevance;Relative information content;Incremental information con-tent;Firm market value;Economic value added (EVA);Residual income;Economic profits;Earnings;Cash from operations;Charge for capital
1.Introduction and motivation
For centuries,economists have reasoned that for a firm to create wealth it must earn more than its cost of debt and equity capital (Hamilton,1777;0165-4101/97/$17.00 1997Elvier Science B.V.All rights rerved.
PII S 0165-4101(98)00010-X
302G.C.Biddle et al./Journal of Accounting and Economics24(1997)301–336 Marshall,1890).In the twentieth century,this concept has been operationalized under various labels including residual inco
生活的减法me. Residual income has been recommended as an internal measure of business-unit performance(Solomons, 1965)and as an external performance measure forfinancial reporting(Anthony, 1973,1982a,b).General Motors applied this concept in the1920s and General Electric coined the term‘residual income’in the1950s and ud it to asss the performance of its decentralized divisions(Stern Stewart EVA Roundtable, 1994).
More recently,Stern Stewart&Company has advocated that a trademarked variant of residual income,economic value added(EVA),be ud instead of earnings or cash from operations as a measure of both internal and external performance. They argue:“Abandon earnings per share”(Stewart,1991)(p.2).“Earnings,earnings per share,and earnings growth are misleading measures of corporate performance”(Stewart,1991),(p.66).“The best practical periodic performance measure is economic value added(EVA)”(Stewart,1991(p.66).“Forget EPS,ROE and ROI.EVA is what drives stock prices”(Stern Stewart advertiment in Harvard Business Review,November—December,1995,p.20). Stewart(1994)cites in-hou rearch indicating that“EVA stands well out from the crowd as the single best measure of wealth creation on a contemporaneous basis”and“EVA is almost50%better than its clost accounting-bad com-petitor in explaining changes in shareholder wealth”(p.75).
This study provides independent empirical evidence on the information content of EVA,residual income,and two mandated performance measures, earnings and cashflow from operations.Our inquiry is motivated by:the claims cited above,interest in EVA in the business press,increasing u of EVA by firms,increasing interest in EVA among academics,and potential interest in EVA among accounting policy makers.Citations of EVA in the business press have grown exponentially,rising from1in1989to294in1996(Lexis/Nexis ‘allnews’library).Fortune has touted EVA as“The Real Key to Creating Wealth”(30September1993),“A New Way to Find Bargains”(9December 1996),and has begun augmenting its well-known‘500’ranking with an annual Residual income is generally defined as after-tax operating profits less a charge for invested capital.Operating profits are profits before deducting the after-tax cost of interest expen.The firm’s weighted average cost of debt and equity capital is deducted in the capital charge.Other labels include:abnormal earnings(Feltham and Ohlson,1995);excess earnings(Canning,1929,Preinreich, 1936,1937,1938);excess income(Kay,1976;Peasnell,1981,1982);excess realizable profit(Edwards and Bell,1961);and super-profits(Edey,1957).
Stern Stewart&Company is a New York-bad consultingfirm that markets the‘EVA Financial Management System’for internal and external performance measurement and incentive compensati
on.Performance measures marketed by competingfirms include cash-flow return on investment(CFROI)by Boston Consulting Group’s HOLT Value Associates,discounted cash-flow analysis(DCA)by Alcar,discounted economic profits(EP)by Marakon Associates,and economic value management(EVM)by KPMG Peat Marwick.
G.C.Biddle et al./Journal of Accounting and Economics24(1997)301–336303‘Performance1000’bad on data from Stern Stewart(Tully,1993,1994;Fisher, 1995;Lieber,1996;Teitelbaum,1997).
Companies that have adopted EVA for performance measurement and/or incentive compensation include AT&T,Coca Cola,Eli Lilly,Georgia Pacific, Polaroid,Quaker Oats,Sprint,Teledyne and Tenneco.The‘EVA Financial Management System’is alleged to encourage managers to act more like owners by helping managers make improved operating,financing and investment decisions. Evidence provided in Wallace(1997)suggests that managers com-pensated on the basis of EVA(instead of earnings)take actions consistent with EVA-bad incentives.
Recently,academics have shown interest in models of equity valuation that expressfirm value in terms of book value and the expected stream of residual income or‘abnormal earnings’(Ohlson,1995;
成长手抄报Feltham and Ohlson,1995).Our study provides empirical evidence on whether current period realizations of residual income(RI)and EVA are more cloly associated with stock returns than are traditional accounting measures such as earnings and cash from operations(CFO).
Finally,data on the information content of EVA and RI provide potentially uful input to the normative policy debate on what performance measure(s) should be reported infinancial statements. Financial reporting has been criticized for low-quality and lack of relevance in today’s information-rich environment.The AICPA Special Committee on Financial Reporting(1994), the Jenkins Committee,makes suggestions for improvingfinancial reporting that are consistent withfirms using EVA for internal decision making and external reporting.A prediction from an April1995AICPA workshop on the future offinancial management is that EVA will replace EPS in¹he¼all Street Journal’s regular stock and earnings reports(Zarowin,1995)(p.48).Widespread interest in revisiting the quality offinancial reporting suggests that altern-atives to currently mandated performance measures should be evaluated for CFO Basil Anderson of Scott Paper states:‘‘We ud to have differentfinancial measures for different purpos—discounted cashflow for capital decisions,another measure for rewarding performance and the like.2Now EVA is one measure that integrates all that.2it offers an excellent link to the creation of shareholder value’’(Walbert,1994)pp.111—112.Jim
Meenan,CFO of AT&T’s communications rvices group express a similar view:‘‘Every decision is now bad on EVA.The motivation of our business units is no longer just to make a profit.The drive is to earn the cost of capital.2when you drive your business units toward EVA,you’re really driving the correlation with market value’’(Walbert,1994)(p.112).Eugene Vell,managing director of Oppenheimer Capital states:‘‘Thefirst thing we look at when we pick companies is,are they motivated by EVA?We prefer it to measures like EPS or return on equity.’’(Tully,1994)(p.143). We emphasize that our results are only an input to the policy making process.Each of the measures we consider may have value in other decision ,cash from operations may provide valuable information to lenders and suppliers about liquidity.Questions regarding cost and best source(s)of data are beyond the scope of this rearch.
304G.C.Biddle et al./Journal of Accounting and Economics24(1997)301–336
value-relevance.This study provides evidence that we hope will be uful to policy makers who may be interested in EVA or RI as replacements(or complements)to earnings and CFO as key measures offirm performance. Thefirst(of two)empirical questions we address is
Q1:Do EVA and/or RI dominate currently mandated performance measures,earnings and operating cashflow,in explaining contempor-aneous annual stock returns?
This relative information content question examines which variables(EVA,RI, CFO or earnings)have a greater association with contemporaneous stock returns and provides a direct test of one of Stern Stewart’s claims about the superiority of EVA.(In Section5.5we examine parately another Stern Stewart claim that EVA outperforms earnings in explainingfirm values.)Using a sample of6,174firm-years reprenting both adopters and non-adopters of EVA over the period1984—1993,tests of question1indicate that earnings(R "12.8%)is significantly more highly associated with market-adjusted annual returns than are RI(R "7.3%)or EVA(R "6.5%)and that all three of the measures dominate CFO(R "2.8%).Thisfinding is supported across a number of alternative specifications.
Second,we examine whether EVA and/or RI complement currently mandated performance measures,earnings and CFO:
Q2:Do components unique to EVA and/or RI help explain contempor-aneous stock returns beyond that explained by CFO and earnings? This is equivalent to asking:Does the market appear to value a given EVA component beyond the information contained in the other components?To address this incremental information content question,we decompo EVA into ,cash from operations,operating accruals,capital charge,and accounting‘adjustments’)and evaluate the contribution of each component toward explaining contemporaneous stock returns.For the full sampl
e,while each component is significantly associated with market-adjusted returns,the EVA components do not appear to be economically significant.Further,tests across alternative specifications indicate that,while cashflow and accrual components are consistently significant,components unique to EVA(capital charge and accounting adjustments)are typically not significant.Considering the relative and incremental information content results together,neither EVA nor RI appears to dominate earnings in its association with stock market returns.
The remainder of the paper is organized as follows.Section2provides a description of EVA and its components,prents hypothes,and describes statistical tests for relative and incremental information content.Section3
G.C.Biddle et al./Journal of Accounting and Economics24(1997)301–336305 reports sample lection criteria,variable definitions,and descriptive statistics. Section4provides empirical results on the relative and incremental information content of EVA and its components.Section5reports various extensions and nsitivity analys.We clo with a summary and a discussion of potential factors contributing to the failure of EVA and/or RI to dominate earnings.
科技故事2.Components of EVA,hypothes and statistical tests
2.1.Linkages between operating cashflow,earnings,residual income and E»A This ction describes linkages between operating cashflows(CFO),earnings before extraordinary items(EBEI),residual income(RI)and economic value added(EVA).We begin by partitioning earnings into operating cashflows and accruals:
EBEI"CFO#Accrual,
where
长此以往
CFO"net cash provided by operating activities.
Accrual"total accruals related to operating(as oppod to investing or financing)activities, e.g.,depreciation,amortization, non-cash溪居即事全诗拼音
current asts, current liabilities(other than notes payable and
current portion of long-term debt),and non-current portion of
deferred taxes.
网页版qq在线聊天
Next,we define net operating profits after tax(NOPAT)as EBEI plus the after-tax cost of interest expen
NOPAT"EBEI#ATInt,
where
ATInt"the after-tax equivalent of book interest expen.
NOPAT parates operating activities fromfinancing activities by adding back the after-tax effect of debtfinancing charges(interest expen)included in EBEI. Residual income differs from EBEI in that it measures operating performance (NOPAT)net of a charge for the cost of all debt and equity capital employed: RI"NOPAT!(k*Capital),
where
k"Stern Stewart’s estimate of thefirm’s weighted average cost of capital.
