Usefulness of Accounting Earnings, Residual Income, and Eva?: A Value-Relevance Perspective

Motivated by the popular press, hailing of Economic Value Added (EVA) as the best performance measure of a company's value creation, this study examines the value relevance of three profitability measures: operating income (OI), residual income (RI), and EVA. Based on a formal valuation model of stock returns developed by Easton and Harris (1991), we find that all three profitability measures have information content in terms of value-relevance. However, contrary to the claim of EVA advocates, our evidence does not support the assertion that EVA is the best measure for valuation purpose. In contrast, the OI regressions tend to show higher R-squares than the RI regressions which in turn have higher R-squares than the EVA regressions, although the differences are statistically insignificant.