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Abstract

This research empirically tests the relative and incremental information content of performance measures EVA, EPS, ROA and ROE against the Market Value of the shares in the four major Australian banks. Data was obtained from database sources for the purpose of calculating the EVA and extracting the EPS, ROA, ROE and Share Market Value of the four major banks in Australia for the years 2003 to 2011.

Two null hypotheses were derived from the literature and tested using the Multiple Linear Regression method. In contrast to results commonly reported, no significant relationship was found between EVA and the market value in terms of relevant information content. However, the incremental information content of EVA was found to be significant in the model tested. This study did not test the different models for calculating EVA which future research may investigate. Future research may also examine more performance measures in the model.

Keywords

Economic Value Added

Relative Information Content

Incremental Information Content

Australian Banking Firms

Introduction

The balance sheet is traditionally considered to provide the basis for determining the wealth perspective of shareholders, however, it is only through the application of ratios that the measurement of changes to shareholder wealth are revealed for assessment. Traditional accounting ratios such as return on assets (ROA) and earnings per share (EPS) have been found to provide earnings information (Yee, 2007) but have been criticised for failing to consider differences in earnings capability due to variations in the cost of capital (Jackson, 1996). This is especially important when assessing the relevance of earnings to shareholder wealth.

To address the shortcomings of the traditional ratios Stern and Stewart (1993) proposed the application of the economic value added model (EVA(TM)). This model makes allowances for the cost of capital, both equity and debt, as well as adjusting for any research and development costs expensed rather than capitalised. This approach has been claimed to provide a useful measure for better understanding the earnings performance in terms of value-relevance (Chen and Dodd, 2001; Ratnatunga and Montali, 2008).

The return on assets (ROA) and the earnings per share (EPS) however continue to be reported in the popular financial press. Additionally, the EPS is a ratio that must be included in the financial report of...

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