Economic Profit Measures and Market Value of Shares: Comparison of the Relationship

Abstract

Authors: Yulia Nikolayevna Naydenova National Research University The Higher School of Economics yunaydenova@hse.ru

Stanislav Sergeevich Blinov - National Research University "Higher School of Economics"

The paper presents a theoretical overview of two models: economic value added (EVA) and Edwards-Bell-Ohlson (EBO) valuation model. The core difference between these models is that EVA measures economic profit based on invested capital, whereas economic profit calculated with EBO model is based on equity value. Thereby it was hypothesized that measure of the latter model has higher explanatory power of company’s capitalization and market value added than economic value added. The findings suggest that both measures have a weaker relationship with market capitalization of equity capital than accounting measures (particularly EAT). However, economic profit measure, calculated with EBO model, significantly outperforms EVA and EAT in explanatory power of MVA.