Information Content of Economic Value Added: Evidence from Indian Software Industry

There has not been sufficient empirical research to substantiate the claim that EVA is the best performance measure in terms of value relevance. This study is basically motivated the interest in EVA in the business press, increasing use of EVA by firms, increasing interest in EVA among academics and potential interest in EVA among accounting policy makers. We have tried to provide independent empirical evidence on the information content of EVA and two mandated performance measures like earnings and operating cash flow.

The first part of analysis uses pooled time series, cross sectional data of 136 listed Indian software companies during the period 2000–2010 to evaluate the usefulness of EVA and other accounting based performance measures. The relative information content indicate that over this period EVA explains some 17.2% of variation in stock return which is next to EOA (R² = 20.3%) followed by cash flow (R² = 10.9%). In the second part of the analysis, the components of EVA are specified as explanatory variables in regression with excess returns. When examining components of EVA (which are shared with closely related performance measures) after tax interest by far make the largest incremental contribution in explaining stock return followed by the cash flow components. Whereas, the accruals and the capital charge have much smaller contribution towards explaining the stock return.