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Article
Publication date: 3 June 2014

Wael Mostafa

Many studies examine the relative information content of earnings and cash flows from operations. Most studies find that earnings have higher information content than cash…

Abstract

Purpose

Many studies examine the relative information content of earnings and cash flows from operations. Most studies find that earnings have higher information content than cash flows. An interesting question that follows is whether these findings hold after controlling the extremity of earnings and cash flows. The purpose of this paper is to examine the relative information content of earnings and cash flows in the following four different cases: first, moderate earnings vs moderate cash flows, second, extreme earnings vs moderate cash flows, third, moderate earnings vs extreme cash flows, and fourth, extreme earnings vs extreme cash flows.

Design/methodology/approach

To assess the relative information content of earnings and cash flows for each of the four cases mentioned above, the authors compare the explanatory power for regression of returns on unexpected earnings relative to regression of returns on unexpected cash flows. Therefore, the author compares the adjusted R2 of the model with earnings variables and the model with cash flows variables using Vuong's test, that examines the statistical significance of the difference between adjusted R2s of the rival (non-nested) models, and interpret a statistically higher adjusted R2 as an indicator for higher relative information content.

Findings

The results show that: first, when both earnings and cash flows are moderate, earnings are more highly associated with stock market price changes than cash flows, second, when both earnings and cash flows are extreme, earnings also have greater relative information content than cash flows, third, when the extremity differs between earnings and cash flows, the moderate variable is superior to the other extreme variable in explaining security returns. These results suggest that earnings are definitely more value relevant than cash flows. However, only in cases when cash flows from operations are moderate and earnings are extreme, cash flows possess higher information content than earnings.

Practical implications

The explanatory power for stock returns will be higher for earnings or cash flows depending on which is more highly persistent. This result reverses the conventional finding of the superiority of earnings over cash flows in explaining security returns.

Originality/value

In contrast to previous studies, the authors control for the extremity of earnings and cash flows when evaluating the relative information content of earnings and cash flows from operations.

Details

Managerial Finance, vol. 40 no. 7
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 31 October 2008

Amal A. Said, Hassan R. HassabElnaby and Tanya S. Nowlin

The purpose of this paper is to examine the relative and incremental information content of a cash recovery‐based measure of performance, the estimated internal rate of…

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1042

Abstract

Purpose

The purpose of this paper is to examine the relative and incremental information content of a cash recovery‐based measure of performance, the estimated internal rate of return, vs an earnings‐based measure of performance, return on assets, in explaining firms' economic performance.

Design/methodology/approach

The paper uses the cash recovery rate that is based on continuous time analysis and U‐shaped cash flows to derive the estimated internal rate of return and compare it to return on assets. A cross‐sectional sample was used over a short interval (year 1993 and year 2005) and a time‐series sample (1993‐2005) to empirically examine the relative and incremental information content of the competing measures. Tobin's q and stock returns are used as performance benchmarks.

Findings

The results of the empirical tests indicate that the estimated internal rate of return provides better relative and incremental information content over earnings‐based measures of performance. Specifically, the empirical evidence shows that the estimated internal rate of return is consistently positively related to Tobin's q and stock returns over all measurement intervals.

Research limitations/implications

These results imply that earnings‐based performance measures are less value relevant compared to cash recovery‐based measures. There are some limitations that may apply to this study. First, the systematic measurement error in estimating the cash recovery rate may not be independent of the measurement error in the estimated internal rate of return. Second, the performance benchmarks used in the study are not free from problems. Particularly, the return on assets is influenced by firms' rate of growth and the Tobin's q is not a perfect measure of business performance. Therefore, one avenue of future research is to assess the usefulness of financial accounting data for analysts forecast. Moreover, future research may also examine the role of institutional changes in financial reporting and its effect on the quality of earnings and economic performance.

Originality/value

This paper presents extended research on cash recovery‐based vs earnings‐based metrics as proxies for economic return using improved research designs, larger samples and new sensitivity analyses.

Details

Review of Accounting and Finance, vol. 7 no. 4
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 October 2008

P.D. Erasmus

This study implements inflation adjustments, as proposed by International Accounting Standard 15 (IAS15), to determine an inflation‐adjusted version of Economic Value…

Abstract

This study implements inflation adjustments, as proposed by International Accounting Standard 15 (IAS15), to determine an inflation‐adjusted version of Economic Value Added (EVA). The relationships between the nominal (EVAnom) and inflation‐adjusted (EVAreal) versions of EVA, and market‐adjusted share returns are investigated, and compared with those of residual income, earnings and operating cash flow. Relative information content tests suggest that earnings have the strongest relationship with share returns, while the results of the incremental tests indicate that the EVAnom and EVAreal components do not provide statistically significant information content beyond that provided by residual income.

Details

Meditari Accountancy Research, vol. 16 no. 2
Type: Research Article
ISSN: 1022-2529

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Article
Publication date: 25 October 2011

Satish Kumar and A.K. Sharma

The main objective of this study is to examine the claim of economic value added (EVA) proponents about its superiority as a financial performance measure compared to five…

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2601

Abstract

Purpose

The main objective of this study is to examine the claim of economic value added (EVA) proponents about its superiority as a financial performance measure compared to five traditional performance measures, i.e. net operating profit after tax (NOPAT), cash flow from operations (OCF), earnings per share (EPS), return on capital employed (ROCE) and return on equity (ROE) in Indian manufacturing sector, and simultaneously provide its empirical evidences. To achieve this, relative and incremental information content of various performance measures and their relationship with market value added (MVA) is tested and examined.

Design/methodology/approach

Principal component analysis (PCA) is one of the important multivariate methods utilized in business research for data reduction, latent variable modeling, multicollinearity resolution, etc. The present sample consists of 608 firm‐year observations from the Indian manufacturing sector for the period 2000‐2007. Firstly, principal component analysis (PCA) is employed to determine the important variables that explain market value. Secondly, alongside PCA, multiple regression models (OLS) are used to examine the relative and incremental information content of EVA and traditional performance measures.

Findings

These results about PCA reveal that variables like NOPAT, OCF, ROE, ROCE and EVA have maximum influence on the market value (MVA) of the sample companies, whereas EPS has a negative loading, so, EPS is discarded for further analysis. Further, the PCA loading matrix reveals that NOPAT, OCF, ROE and ROCE outscore EVA. The regression results regarding the relative information content test reveal that NOAPT and OCF outperform EVA in explaining the market value of Indian companies. The incremental information content test shows that EVA makes a marginal contribution to information content beyond NOPAT, OCF, ROCE and ROE. Overall, these empirical results about Indian companies do not support the Stern Stewart hypothesis that EVA is superior to traditional accounting‐based measures in association with market value of the firm.

Originality/value

The study concludes that along with financial variables, other non‐financial variables such as employees, product quality, etc., should be considered in order to capture the unexplained variation in the market value of Indian companies.

Details

Journal of Financial Reporting and Accounting, vol. 9 no. 2
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 27 September 2011

Satish Kumar and A.K. Sharma

The purpose of this paper is to examine the claim of economic value added (EVA) proponents about its superiority as a corporate financial performance measure, compared to…

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1663

Abstract

Purpose

The purpose of this paper is to examine the claim of economic value added (EVA) proponents about its superiority as a corporate financial performance measure, compared to traditional performance measures in non‐financial Indian companies and provide empirical evidences.

Design/methodology/approach

The paper uses a sample of 873 firms‐year observations from the Indian market and applies pooled ordinary least square regression to test the relative and incremental information content of EVA and other accounting‐based measures in explaining the market value added.

Findings

The results about relative information content test reveal that NOAPT and OCF outperform EVA in explaining the market value of Indian companies. Incremental information content test shows that EVA makes a marginal contribution to information content beyond traditional performance measures such as NOPAT, OCF, EPS and RONW, etc. Overall the authors' results do not support the hypothesis that EVA is superior to traditional accounting‐based measures in association with market value of the firm.

Originality/value

The authors conclude that non‐financial variables such employees, product quality and community satisfaction should be considered in order to capture the unexplained variation in the market value of the firm.

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Article
Publication date: 17 June 2020

Harnesh Makhija and Pankaj Trivedi

The paper aims to find out the information content of performance measures from accounting and value-based measures that best explain the total shareholder return.

Abstract

Purpose

The paper aims to find out the information content of performance measures from accounting and value-based measures that best explain the total shareholder return.

Design/ methodology/ approach

To achieve this aim, static and dynamic panel data regression analysis is applied to the sample of 56 Indian companies taken from the Nifty Midcap 100 Index, between 2012 and 2019.

Findings

It is found that accounting-based measures have more relative information content in predicting total shareholder return as compared to value-based measures. Economic value added (EVA) and cash value added (CVA) do not add to the information content provided by accounting-based measures. A combination of accounting-based measures and value-added intellectual coefficient (VAIC) adds marginally to the information content provided by accounting-based measures in explaining the total shareholder return. Dynamic panel regression analysis shows that return on assets (ROA), return on capital employed (ROCE), return on equity (ROE) and EVA have a significant impact on total shareholder return.

Originality/value

In this study, along with EVA, other measures from value-based measures, i.e. CVA are empirically tested to explain the total shareholder return. Intellectual capital efficiency computed by VAIC is also empirically tested along with accounting-based measures, EVA, CVA and market value added (MVA). To bring robustness to findings, data are tested by using dynamic panel regression analysis.

Details

International Journal of Productivity and Performance Management, vol. 70 no. 5
Type: Research Article
ISSN: 1741-0401

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Article
Publication date: 4 March 2014

Cheng-Yi Chien, Tzu-Hsiang Liao and Hsiu-Chuan Lee

– This paper aims to examine the impact of a reduction in tick size on the information content of the order book by using data from the Taiwan Stock Exchange (TWSE).

Abstract

Purpose

This paper aims to examine the impact of a reduction in tick size on the information content of the order book by using data from the Taiwan Stock Exchange (TWSE).

Design/methodology/approach

To estimate the information content of the order book, the modified information share proposed by Hasbrouck and extended by Lien and Shrestha is used in this paper.

Findings

The empirical results show that the limit order book is informative. Furthermore, the results indicate that a reduction in tick size will decrease the information content of the order book and the decrease in the information content of the order book is positively related to the thinner order book.

Originality/value

This paper suggests that, in order to enhance the information content of the order book, the TWSE should disclose the full limit order book.

Details

Managerial Finance, vol. 40 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 March 2002

S.P. Bandyopadhyay, A.S. Hilton and G.D. Richardson

Explains that Canada is currently deciding whether to harmonize with US or international accounting standards and whether to allow Canadian SEC registrants to file their…

Abstract

Explains that Canada is currently deciding whether to harmonize with US or international accounting standards and whether to allow Canadian SEC registrants to file their financial statements using US standards, outlines previous research on the information content of US/Canadian differences and tests the relative and incremental information content of 156 interlisted firms 1996‐1998. Explains the methodology and presents the results, which suggest that there is little difference in the relative information content of the two sets of standards although each provides information incremental to the other. Concludes that investors will not be harmed either by harmonization or by allowing financial reporting under US standards.

Details

Managerial Finance, vol. 28 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 11 April 2016

Vijay Kumar Gupta and Ekta Sikarwar

The purpose of this paper is to examine the superiority of economic value added (EVA) over the traditional accounting performance measures, i.e. earnings per share, return…

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1268

Abstract

Purpose

The purpose of this paper is to examine the superiority of economic value added (EVA) over the traditional accounting performance measures, i.e. earnings per share, return on assets and return on equity. For this purpose, the relative and incremental information content of EVA and accounting measures are tested by examining the relationship of these measures with stock returns.

Design/methodology/approach

The analysis is performed for a sample of 50 Indian companies selected from the index Nifty 50 for the period of 2008-2011. The penal regression models are applied to examine the relative and incremental information content of EVA and traditional performance measures.

Findings

The study finds that EVA has more relevant and incremental information content than accounting measures for analyzing shareholder value creation. These results confirm that EVA is better performance measure than traditional accounting measures.

Research limitations/implications

The study could be further extended for the sample of other firms covering the specific industries and sectors. The calculation of EVA could be modified with respect to the adjustment in profit after tax and the calculation of cost of capital.

Practical implications

The study has implications for the managers who are responsible to generate the wealth of shareholders by formulating the corporate financial policies. The findings also help investors who are closely concerned with the financial health of the firm while taking their investment decisions.

Originality/value

The novelty of this study is that it relates total return of firm’s stock with the financial measures unlike the previous literature.

Details

International Journal of Productivity and Performance Management, vol. 65 no. 4
Type: Research Article
ISSN: 1741-0401

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Article
Publication date: 30 October 2009

Dimitrios I. Maditinos, Željko Šević and Nikolaos G. Theriou

The purpose of this paper is to investigate the explanatory power of two value‐based performance measurement models, Economic Value Added (EVA®) and shareholder value…

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1931

Abstract

Purpose

The purpose of this paper is to investigate the explanatory power of two value‐based performance measurement models, Economic Value Added (EVA®) and shareholder value added (SVA), compared with three traditional accounting performance measures: earnings per share (EPS), return on investment (ROI), and return on equity (ROE), in explaining stock market returns in the Athens Stock Exchange (ASE).

Design/methodology/approach

The paper uses the Easton and Harris formal valuation model and employs both a relative and an incremental information content approach to examine which performance measure best explains stock market returns; and the explanatory power of the pairwise combinations of one value‐based performance measurement model and one traditional accounting performance measure in explaining stock market returns. For this purpose, pooled time‐series, cross‐sectional data of listed companies in the Athens Stock Exchange (ASE) over the period 1992‐2001 have been collected and modelled.

Findings

Relative information content tests reveal that stock market returns are more closely associated with EPS than with EVA® or other performance measures. However, incremental information content tests suggest that the pairwise combination of EVA® with EPS increases significantly the explanatory power in explaining stock market returns.

Practical implications

The results suggest that the market participants in the Greek stock market should pay additional attention to EVA® but they should also consider other determinants to develop their investment strategies.

Originality/value

The paper is one of the first studies on the value relevance of traditional accounting (EPS, ROI, and ROE) and value‐based (EVA® and SVA) performance measures in explaining stock market returns in the ASE. The results extend the understanding of the role of EVA® and SVA in explaining stock market returns in the ASE, and, moreover, whether they may affect investors' decisions in a continental European market with market characteristics similar to that of Greece.

Details

Journal of Modelling in Management, vol. 4 no. 3
Type: Research Article
ISSN: 1746-5664

Keywords

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