Does EVA valuation model outperform earnings valuation model in explaining market value of equity?

Abstract

AbstractMost of the previous studies examine the efficiency of EVA versus accounting measures as a periodic performance measure. There is hardly any study conducted on examining and comparing the efficiency of EVA based valuation model with the earnings valuation model. However, this study examines and compares the efficiency EVA valuation with earnings valuation by conducting relative information content analysis across the years and on a year‐wise basis. It is observed that future growth value is the only difference between the two valuation models. This study further examines whether future growth value plays a significant role in increasing/decreasing the explanatory ability of EVA based valuation model compared to the earnings valuation model by conducting incremental information content analysis. It conducts both the analyses by using the sample data of 69 large‐cap, 88 mid‐cap and 79 small‐cap companies over the period 2002–17. The relative information content analysis conducted across the years reveals that large and small‐cap companies respond better to the earnings valuation model, whereas mid‐cap companies respond better to EVA based valuation model. The incremental analysis reveals that future growth value plays a significant role in increasing the decreasing explanatory ability of the EVA valuation model. The analysis conducted year‐wise manner also supported the fact.