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ern Stewart. 10 See, for example, Stephen F. O’Byrne, “Does Value Based Management Discourage Investment in Intangibles?, Working paper, Shareholder Value Advisors (1999).

Figure 2 plots Median values of four alternative performance measures — net income (NI), residual income (RI), EVA, and cash flow from operations (CFO) — over the period 198897.11 Since accounting accruals generally reduce net income (e.g., due to depreciation and amortization expense), it is not surprising that median NI plots well below median CFO in each year. EVA and RI lie well below NI because of the incremental charge for equity capital. However, the difference between EVA and RI is relatively small, suggesting that the net effect of Stern Stewart’s accounting adjustments is not large on average.12 Interestingly, despite the sample being drawn from among the largest firms in the U.S. economy, median EVA is negative until 1995 and median RI is negative for every year. Near zero EVA and RI is consistent with a competitive economy in which even the typical large firm has difficulty earning more than its cost of capital. Low values of EVA and RI also are consistent with a potential upward bias in Stern Stewart’s cost of capital estimates (also used here for computing RI). [insert figure 2 about here] CLAIM #1 – EVA BETTER EXPLAINS STOCK RETURNS AND FIRM VALUES Proponents of EVA and other residual income measures have made two primary claims about EVA and/or residual income: 1) they better explain stock returns and firm values than traditional GAAP-based accounting metrics, and 2) they better motivate managers to create shareholder wealth. In this section and the next, we examine recent independent evidence regarding each claim.

The data are from Stern Stewart’s publicly available database and the Standard & Poors COMPUSTAT database. The Stern Stewart data are summarized in Fortune’s annual Performance 1000 issue. 12 For example, in any period, current R&D costs can be approximately equal to the amortization of past capitalized costs. And even if, say, capitalized R&D costs are large and growing, any expense reduction due to capitalization will be offset by higher cost of capital charges due to capitalized R&D in the capital base.

Evidence on Associations with Stock Returns and Firm Values In our recently published article entitled "Does EVA Beat Earnings? Evidence on Associations with Stock Returns and Firm Values",13 we provide evidence on the first claim by examining whether EVA and residual income (RI) are more closely associated with stock returns and firm values than two currently mandated performance metrics – net income (measured as earnings before extraordinary items) and cash flow from operations.14 Specifically, we examine three related questions, the first of which is: Q1: Does EVA and/or RI dominate earnings (NI) and operating cash flow (CFO) in explaining contemporaneous annual stock returns? We examine a sample of 6,174 firm-years over the period 1984-1993. As a test of association (goodness of fit) we use adjusted R-squared (Adj. R2) from a regression of stock market returns on each performance metric.15 Our results, summarized in Figure 3, indicate that current period accounting earnings (NI) is significantly more highly associated with market-adjusted annual stock returns (Adj. R2 = 13%) than are RI (Adj.本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。