Earnings Less Risk-Free Interest Charge (ERIC) and Stock Returns—A Value-Based Management Perspective on ERIC’s Relative and Incremental Information Content

This paper investigates the relative and incremental information content of KPMG’s recently developed metric for shareholder value creation: earnings less risk-free interest charge (ERIC). We assess if ERIC has a better ability to predict stock returns than earnings, cash flow from operations (CFO), before extraordinary items (EBEI), residual income (RI), or economic added (EVA). evaluate data 214 companies listed on U.S. Standard & Poor’s 500 Index 2003 2012 (2354 firm-year observations). Similar previous studies, we confirm that CFO EBEI have strongest association with in short term, while EVA trails behind all other metrics. In terms new findings, is best predictor over 5-year period, as well during times crises (from 2009 2010). this also adds beyond EBEI. However, low-short-/mid-term predictive metrics (EVA, ERIC) raises concerns regarding their reliable use future research creation. consequently propose agenda focuses measurement more management value.