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Economic Value Added, Future Accounting Earnings, and Financial Analysts' Earnings Per Share Forecasts

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  • Machuga, Susan M
  • Pfeiffer, Ray J, Jr
  • Verma, Kiran

Abstract

Empirical research to date on the relative effectiveness of Economic Value Added (EVA) and earnings per share (EPS) as measures of firm performance for stock valuation has been mixed. In contrast to prior research, which primarily focuses on the correspondence of these measures with shareholder value and changes therein, we examine their relative effectiveness in predicting future earnings and their role in enhancing the accuracy of analysts' forecasts. Our results indicate that EVA contains information that is incremental to EPS in predicting future earnings. In addition, we find that despite this potential for EVA to add incremental value to analysts' forecasts of future earnings, analysts do not use the information in reported EVA appropriately, but appear rather to overweigh it. Copyright 2002 by Kluwer Academic Publishers

Suggested Citation

  • Machuga, Susan M & Pfeiffer, Ray J, Jr & Verma, Kiran, 2002. "Economic Value Added, Future Accounting Earnings, and Financial Analysts' Earnings Per Share Forecasts," Review of Quantitative Finance and Accounting, Springer, vol. 18(1), pages 59-73, January.
    • Handle: RePEc:kap:rqfnac:v:18:y:2002:i:1:p:59-73
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    Citations

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    Cited by:

    1. Cipollini, Andrea & Fiordelisi, Franco, 2012. "Economic value, competition and financial distress in the European banking system," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3101-3109.
    2. Zhaoyang Gu & Jian Xue, 2007. "Do analysts overreact to extreme good news in earnings?," Review of Quantitative Finance and Accounting, Springer, vol. 29(4), pages 415-431, November.
    3. Sujata Behera, 2021. "Does EVA valuation model outperform earnings valuation model in explaining market value of equity?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6312-6337, October.
    4. Warr, Richard S., 2005. "An empirical study of inflation distortions to EVA," Journal of Economics and Business, Elsevier, vol. 57(2), pages 119-137.
    5. Zbysław Dobrowolski & Grzegorz Drozdowski & Mirela Panait & Arkadiusz Babczuk, 2022. "Can the Economic Value Added Be Used as the Universal Financial Metric?," Sustainability, MDPI, vol. 14(5), pages 1-14, March.
    6. Ahmadyan , Azam & Khansari , Rasool, 2018. "Application of Economic Value Added in the Banking Sector of Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 13(3), pages 291-318, July.
    7. David Sparling & Calum G. Turvey, 2003. "Further thoughts on the relationship between economic value added and stock market performance," Agribusiness, John Wiley & Sons, Ltd., vol. 19(2), pages 255-267.
    8. Peter Kien Pham & Jo-Ann Suchard & Jason Zein, 2011. "Corporate governance and alternative performance measures: evidence from Australian firms," Australian Journal of Management, Australian School of Business, vol. 36(3), pages 371-386, December.
    9. Ibendahl, Gregory A. & Fleming, Ronald A., 2003. "Using Economic Value Added (Eva) To Examine Farm Businesses," 2003 Annual Meeting, February 1-5, 2003, Mobile, Alabama 35145, Southern Agricultural Economics Association.
    10. Meena Subedi & Ali Farazmand, 2020. "Economic Value Added (EVA) for Performance Evaluation of Public Organizations," Public Organization Review, Springer, vol. 20(4), pages 613-630, December.

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