Value relevance of EVA in mergers and acquisitions

Abstract

This study investigates the value-relevance of the EVA (Economic Value Added) in the aspect that the EVA can outperform other accounting measures using mergers and acquisitions data. Relative and incremental information content tests are conducted to investigate whether EVA is more highly correlated with the takeover premium, acquirer excess return and combined return than other traditional accounting measures (CFO, EBEI, RI), and examine which components of EVA, if any, contribute to these association. Relative information content tests show that CFO is more highly correlated with the target premium and combined return while EVA can best describe the variation in acquirer abnormal return. However, these differences in explanatory power are not significant. For the incremental information content test, the results show that EVA components add only marginally to the information content (only CFO and Capital Charge (CapChg) which is not the unique component of EVA). Considered together, there is no enough evidence to claim that EVA outperforms other accounting measures in mergers and acquisitions.