The Introduction of Economic Value Added (EVA) in the Corporate World

The objective of this study is to introduce the concept of Economic Value Added (EVA) in the Greek context and to provide an explanation on the utilization of both earnings and EVAin the ASE. The study interprets results obtained from an analysis carried out on the basis of secondary financial data relating to the period 1995-2001. Proponents of EVA provided evidence to establish this method as a superior performance measurement and incentive compensation system and claimed that it is really better to use EVA than traditional accounting performance measures such as earnings, EPS, ROI or ROE (see: Stewart, 1991; Tully 1993; Stern et al., 1995; Ehrbar, 1998). Many other scholars, such as Milunovich and Tseui (1996), Lehn and Makhija (1996; 1997), and Forker and Powell (2004) have published studies in support of the superiority of EVA. However, studies focused on whether EVA is more highly related with stock returns than other performance measures provided mixed and controversial results. This study employs pooled time-series, cross sectional data of listed companies in the ASE over the period 1995 – 2001 to examine whether EVA or earnings per share (EPS) is associated more strongly with stock returns. Both relative and incremental content approaches have been tested. Relative information content tests revealed that stock returns are more closely associated with EPS than EVA. On the other hand, incremental information content tests provide evidence that EVA adds significant explanatory power to EPS in explaining stock returns.