Discussion of EVA versus Earnings: Does It Matter Which Is More Highly Correlated with Stock Returns?

A distinctive feature of the paper is its use of both theoretical and empirical approaches to understanding EVA. The authors first analyze a principal-agent model using certaine parametric assumptions. They model EVA and accounting earnings as two distinct, noisy perfomance measures of the same uderlying construct, with both measures providing information to the principal about the agent's action choices. They subsequently derive a theoretical expression for the percentage value-added contributed by using EVA as a measure for evaluating managerial perfomance. A key finding is that this expression can be restated as a function of the observed correlations of each of the metrics with stock price. In the second part of the paper, the authors estimate this value for their sample of firms using time-series data, and then correlate the estimates cross-sectionally with the decision to adopt EVA by these firms. In support of the theoretical results, the authors find a positive association, after controlling for other factors such as size, leverage, and growth oppportunities.

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