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. [Insert Figure 4 here] We also examine a related claim that EVA is more highly associated with firm values (versus stock returns considered above): Q3: Does EVA dominate earnings in explaining firm values? To address this question, we replicate and extend a study authored by former Stern Stewart vicepresident Stephen O’Byrne that appeared in the Spring 1996 issue of this journal.17 O'Byrne first compares Adj. R2s from regressing firm value on EVA and earnings measured as NOPAT. He reports an Adj. R2 of 31% for the EVA regression and 33% for the NOPAT regression. Next, he adjusts the EVA regression by: 1) allowing separate coefficients for positive and negative values of EVA, 2) including the natural log of capital in an attempt to capture differences in the way the market values firms of different sizes, and 3) including 57 industry dummy variables in order to capture potential industry effects. When all of these adjustments are included, O’Byrne obtains a larger Adj. R2 for the enhanced EVA regression (56%) than for NOPAT (33%). However, notice that O'Byrne makes ‘adjustments’ only to the EVA regression. When we ‘level the playing field’ by applying the same adjustments to the NOPAT regression and also examine NI, EVA’s superiority disappears. The NI regression has a significantly higher association with firm value (Adj. R2 = 53%) than the EVA regression (Adj. R2 = 50%) and the NOPAT regression (Adj. R2 = 49%). The latter two are statistically indistinguishable.

With our stock returns tests, these results do not support the contention that EVA outperforms earnings in explaining firm values. To the contrary, and in contrast to claims by Stern Stewart, our evidence suggests that earnings more often dominates EVA in value-relevance to market participants.18 Why don’t residual income and EVA “beat ” earnings? There are several potential explanations as to why RI and EVA do not dominate earnings in associations with stock returns and firm values. First, recall that the valuation model in equation (4b) is specified in terms of discounted future RI (or EVA) – not on past and current realizations. In this light, our evidence suggests that realized earnings are a better predictor of future EVA than realized EVA itself.19 Also recall that the key difference between NI and RI is the cost of equity capital, and that the key difference between RI and EVA are Stern Stewart’s accounting adjustments (such as the capitalization of R&D). Earnings could dominate RI if market participants use cost of capital estimates different than those provided by Stern Stewart. Earnings could dominate EVA if Stern Stewart’s accounting adjustments have the effect of “undoing’ discretionary accruals that market participants use to infer firms’ future prospects. Alternatively, the market may make a set of accounting adjustments different from those applied by Stern Stewart.

Other independent studies report similar findings. See S. Chen and J. Dodd, "Economic Valued Added EVA : An Empirical Examination of a New Corporate Performance Measure," Journal of Managerial Issues (Fall 1997): 318-333; S. Chen and J. Dodd, "Usefulness of Accounting Earnings, Residual Income, and EVA: A Valuerelevance Perspective," working paper, Clarion University (1997); Pamela P. Peterson and David R. Peterson, "Company Performance and Measures of Value Added," The Research Foundation of the Institute of Chartered Financial Ana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。