EVA, an acronym for Economic Value Added, is the registered trade name of Stern Stewart & Company for the version of a long-known and compelling concept called residual income. Hailed by Fortune as the “New Key to Creating Wealth” and “Today’s Hottest Financial Product,” EVA has recently attracted considerable attention as a valuation and incentive tool. Motivated by the popularity of EVA as the best performance measure of a company’s value creation, this study examines the value relevance of EVA and traditional accounting profits such as EPS, OI (Operating Income), CFO (Cash Flow from Operation)
First, it was found that EVA has information contents in terms of value-relevance. However EVA couldn’t explain stock returns better than EPS. Second, the unique adjustments applied to the calculation of EVA could not give incremental information to accounting profits. Next, the market situation had influenced stock returns significantly, however it couldn’t be found that EVA in up-turn and downturn affected stock returns differently. Then, it was verified whether IMF changed EVA of Korean companies and value-relevance of EVA or EPS. Even though average of EVA increased after IMF crisis, the increase was not statistically significant. Also, the value-relevance of EPS has grown, however the value-relevance of EVA did not change after IMF crisis.