Does EVA Have More Information Content with Stock Return than Profitability Ratios? Evidence from Malaysia

The purpose of this study is to provide an answer to the claim made by Stern Stewart and company that Economic Value Added (EVA) has a superior metric to traditional accounting measures in explaining the stock return of a firm. This study is concerned about the relative and incremental information content of EVA and profitability ratios like return on assets (ROA), return on equity (ROE), and return on sales (ROS). It covers 395 non-financial companies listed on the main market of Bursa Malaysia from 2006 to 2015. The panel data regression is used to test the hypotheses, empirically. The findings did not support the claim of EVA proponents concerning its superiority over profitability ratios. The relative information content test revealed that profitability ratios namely ROA, ROE, and ROS outperform EVA in their relationship with the stock return. Furthermore, the incremental information content test also indicated that EVA has minimal incremental information content with the stock return compared to ROA, ROE, and ROS. In summary, the findings show that EVA is a valuable performance measure in the Malaysian context. Therefore, it is recommended to Malaysian firms to use EVA with profitability ratios in the firm’s performance evaluation.