Does the EVA valuation model explain the market value of equity better under changing required return than constant required return?

Sujata Behera ()
Additional contact information
Sujata Behera: Institute of Management, Nirma University

Financial Innovation, 2020, vol. 6, issue 1, 1-23

Abstract: Abstract Through the Economic-Value-Added (EVA) valuation model, the expected market value of equity can be determined by adding the book value of equity with the present value of expected EVAs under the assumption of constant required return and constant return on equity. The equation of EVA valuation model has taken its shape under the assumption of constant required return and constant return on equity. However, a large body of empirical evidence indicates that required rate of return never remain constant. The EVA- valuation model formulated under constant required return cannot be implemented under the scenario of changing required return. In this study, we explored whether the EVA valuation model could be implemented under changing required return by making any changes in the model and found that it could be implemented under the scenario of changing required return by replacing the book value of the equity of the existing model with the present value of required earnings or normal market earnings. We further examined whether the explanatory ability of the EVA valuation model under the assumption of changing required return is better than that of the valuation model under the assumption of constant required return. Relative information content analyses were conducted by considering sample of the intrinsic value of equities determined by valuation models and the market value of equities of 69 large-cap, 88 mid-cap, and 79 small-cap companies. The results showed that the EVA-based valuation model with changing normal market return outperformed the EVA-based valuation model with constant required return.

Keywords: Economic value added (EVA); Capital asset pricing model (CAPM); Expected market value of equity under constant required return (EMVEUCRR); Expected market value of equity under varying required return (EMVEUVRR) (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://link.springer.com/10.1186/s40854-019-0167-8 Abstract (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:fininn:v:6:y:2020:i:1:d:10.1186_s40854-019-0167-8

Ordering information: This journal article can be ordered from
http://www.springer. ... nomics/journal/40589

DOI: 10.1186/s40854-019-0167-8

Access Statistics for this article

Financial Innovation is currently edited by J. Leon Zhao and Zongyi

More articles in Financial Innovation from Springer, Southwestern University of Finance and Economics
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().