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Not all studies, however, report the same level of confidence in EVA’s ability to explain share returns. Biddle et al. (1997) investigate the information content of the measures EVA, RI, earnings before extraordinary item (EBEI) and cash from operations (CFO). Based on their results they reject the claim that EVA has the highest informational content. EBEI is found to be significantly more highly associated with annual market-adjusted share returns than RI, EVA and CFO (Biddle et al., 1997: 316). Although EVA did provide incremental information to EBEI when explaining share returns, the incremental contributions of the EVA components are economically insignificant (Biddle et al., 1997: 320). Furthermore, earnings dominate EVA in explaining firm values (Biddle et al., 1997: 330). These results are repeated in two additional studies conducted by them (Biddle, Bowen and Wallace, 1998: 68; Biddle et al., 1999: 74).

Dodd and Chen (1996: 27; 1997: 5) also report findings that are consistent with those obtained by Biddle et al. (1997). Although EVA and share returns are correlated, these studies report low levels of correlation. The studies also indicate that unadjusted accounting measures are more closely correlated with share returns than EVA.

Ferguson and Leistikow (1998: 85) apply a similar approach to Bacidore et al. (1997) and reject claims that REVA provides more information than EVA. They argue that REVA is inconsistent with finance theory. Furthermore, it is pointed out that even though the relationship between REVA and abnormal returns is highly significant, the R2 value is extremely low. As a result REVA explains almost none of the variation in the abnormal share returns (Ferguson & Leistikow, 1998: 83). They conclude that EVA is the appropriate measure to apply.

Clinton and Chen (1998: 40) find that most of the correlations between EVA, share prices and share returns are either negative or insignificant. EVA is also the only one of the measures investigated in their study that did not consistently reveal significant associations with share prices or share returns (Clinton & Chen, 1998: 41). According to Stewart (1994: 82) EVA should not be compared to shareholder returns, but rather to shareholder value. Clinton and Chen (1998: 42), however, report that the correlation between EVA and share returns is higher than between EVA and the share price. Although these correlations were not consistently significant, it still contradicts the claims made by Stewart.

In another study that investigates EVA’s ability to explain share prices, De Villiers and Auret (1998: 54) determine that EPS outperforms EVA. Year-on-year changes in EPS also offer a better explanation for share prices than changes in EVA (De Villiers & Auret, 1998: 58). Their study concludes that EVA does not offer an advantage over the traditional measure EPS in terms of explaining share prices (De Villiers & Auret, 1998: 62). Possible explanations for EVA’s weak performance include its link to book value instead of total value and the distorting effect of inflation.

Farsio et al. (2000) investigate the relationship between EVA and total returns, calculated for different share indices. When considering the relationship between the current value of EVA, and total returns in the subsequent year, a negative regression slope is observed (Farsio et al., 2000: 116). It appears as if the current level of EVA does not result in a higher total return during the next year. When conducted for values from the same year a weak positive relationship is observed (R2 = 0.07) (Farsio et al., 2000: 117). Including EPS in the regression analysis yields a much higher explanatory power. Almost 99% of the variation in the total return is explained by EVA and EPS combined.

Turvey, Lake, Van Duren and Sparling (2000: 399) investigate the relationship between EVA and the share returns on a sample of Canadian firms in the food processing sector. Their results indicate that no relationship exists between EVA and the stock market performance of the firms’ shares (Turvey et al., 2000: 415). Sparling and Turvey (2003: 266) conduct a similar study for a sample of firms obtained from the Stern Stewart Fortune 1000 database. They evaluate the relationship between EVA and share returns over a three, five and ten year period, and report weak correlations for all three the periods.

Kramer and Pushner (1997: 41) test the relationship between EVA and MVA. The results of their study indicate that there is a stronger relationship between NOPAT and MVA than between EVA and MVA. Based on these results they conclude that the market seems to focus more on profit figures than on EVA. Kramer and Peters (2001: 41) also investigate the relationship between EVA and MVA, but include the effect of capital intensity in their study. They investigate a sample of firms located in different industries and find that EVA is not biased by the level of capital intensity. The results of the study, however, indicate that NOPAT outperforms EVA as a proxy for MVA.

Bao and Bao (1998: 252) consider EVA as a surrogate for a firm’s abnormal economic earnings. They evaluate the explanatory power of abnormal economic earnings relative to value added and report that the results are either statistically insignificant, or that it provides the wrong sign. Their study, however, are conducted

for a period of only two years, and they indicate that this could have an effect on their final results.

Based on an evaluation of the relative and incremental information content of EVA, Palliam (2006: 204) concludes that EVA is a relatively poor predictor of share returns. The relationship between EVA and shareholder returns is found to be weak, and earnings manages to outperform the measure in the relative information content tests. Similar results are reported by Peixoto (2006) for a sample of Portuguese firms, and Kyriazis and Anastassis (2007: 71) for a sample of firms listed on the Athens Stock Exchange.

Some studies question the theoretical validity of EVA. Paulo (2003: 328) argues that EVA is based on financial theory that is seriously flawed. According to him EVA is not a suitable financial performance measure. He bases his argument on the inefficiencies of the CAPM and those studies that indicate that the model is not suitable to use when calculating the cost of capital. He concludes that applying EVA as financial performance measure could expose financial professionals to the risk of legal action (Paulo, 2003: 339).

Keef and Roush (2003: 251) evaluate the theoretical construct that underlies EVA and investigate the relationship between economic profit and the market’s valuation of a firm. Their results indicate that there is no relationship between EVA and a firm’s share performance. They conclude that the real benefits of EVA is not the value of the measure reported, but rather the collective attempts by all levels within a firm to increase its value (Keef & Roush, 2003: 252).