Abstract
We examine whether or not the value relevant information of EVA is fully incorporated in stock prices by constructing trading strategies using signs of changes in both earnings and EVA. The portfolio of stocks with negative changes in earnings coupled with positive changes in EVA yields higher cumulative future returns than do benchmark portfolios over several years (from four to six future years), from the year in which investment portfolios are formed. The multi-regression model shows consistent results. Thus, we conclude that the lower association of stock returns with EVA than with earnings might arise from investors' functional fixation on earnings numbers, not on lower value relevance of EVA.
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