ISSN20453345

VOLUME1,2011

MansoorMAITAH,AbudeltefGALALH,ElshibaniBASHIR
FacultyofEconomicsandManagement,CzechUniversityofLifeSciences,Prague

Thisresearchstudylookedattheanalysisofthepractical
relationshipbetweenEVAandstockreturns,astheresearch
dealt with analyzing the success of the investment policy
basedongenerallyacceptedaccountingindicators.Having
reviewedthetheoreticalresearchonascaleofEVAinterms
oftherelationshipbetweenstockpricesandearnings,and
theEVA,theextentofthebenefitofscaleoftheEVAinthe
design of investment policies will be used to achieve
extraordinaryreturns.Wealsopresentedresearchresults
ofpreviousstudiesinthisarea.Ingeneral,theresultsof
thestudysupporttheoperationofthepreviousstudiesthat
indicatedthatinspiteoftheexistenceoflogicaljustification
oftherelationshipbetweenthetheoryofEVA,stockprices
and revenues, results do not justify this relationship. The
paperwasprocessedwithintheframeworkoftheResearch
Project of MSM 6046070906 "The economics of Czech
agricultural resources and their effective use within the
frameworkofmultifunctionalagrifoodsystems".

G11ValueAddedStockReturnInvestmentInterest
Assets

The concept of the economic value added measure of

efficientperformanceisoneofthemostacceptedeconomic
conceptstoexpresstheresidualincomeafterdeductingthe
cost of capital invested in the company. The concept of
residual income can create value for shareholders so
companymanagementshouldusetheavailableresources
in a manner conducive to achieve a return on invested
capitalthatisgreaterthanthecapitalcost,whether(owned
orborrowed).Incontrast,theconceptofaccountingprofit,
only takes into account the net profit after deducting the
cost of borrowing money (interest). According to this
concept, the residual income of any company can be
expressed as the difference between the value of net
operatingprofitaftertaxafteroperationandthevalueofthe
average cost of capital invested on the company. The
residualincomecanbeexpressedasfollows:
RIt =NOPATtCostofCapitalt (1)
Where:
RIt
Istheresidualincomeonthetimet.
NOPATt Isthenetoperationincomeaftertaxandwithout
deductinginterestonthesametime(t)
CostoftheCapitalt
Is the cost of the capital and it is
calculatedas
CapitalofCapitalt=WACCCapital
Where:
WACC Istheweightedaveragecostofcapital(ownedor
borrowed)
Capital Isthecapitalinvestedwhiter(ownedorborrowed)
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AccordingtoSternStewart&Co,theEVAcanbecalculated
as
EVA=AdjustedNOPATAdjustedCostofCapital (2)
Where
EVA
IstheEconomicValueAdded.
AdjustedNOPAT Is the adjusted net operation income
after tax and without deducting the
interest.
Therefore, the EVA takes a positive value if the adjusted
netoperatingprofitaftertaxisgreaterthanthevalueofthe
adjustedcostofinvestedcapital,InthecontrastEVAtakes
anegativevalueifthevalueoftheadjustednetoperating
profitislessthantheadjustedcostoftheinvestedcapital.
SternStewart&Cohasundertakenseveraladjustmentsto
thenetoperatingprofitaccountingtopreventtheimpactof
accountingpoliciesontheprofit.Thecompanyintroduced
adjustmentstotheconceptoftheinvestedcapital,whichis
used in the calculation of the average cost of capital,
Therefore, the reasons for these adjustments are made
withtheaimofcalculatingtheneteconomicprofitnotthe
accountingprofit.Sotheexclusionofcertainaccounting
adjustments, which do not involve cash flows, and the
capital adjustment to reflect the assets value invested on
thecompany,alongwithexcludingtheeffectofaccounting
policies leads to the possibility of a comparison between
eithertheresultsoftheperformanceofdifferentcompanies
ordifferentsectionswithinthesamecompany,.Italsohelps
to reduce the opportunities for management to use
accountingpoliciesdesignedtocontrolprofitabilitythatare
salutingtheremovaloftheimpactofthesepolicies.(Stern
Stewart&Co)haspointedoutthattheseamendmentsare
essential in view to containing the net operating profit
accountingonmanyofthevalues,whichdonotreflectthe
cash flows, and are subject to the impact of different
accountingpolicies.
According to the EVA concept, the net EVA generated
affects the market value of the company. On the other
hand, raising the EVA for any company will increase its
market value. Stern Stewart also provided another
measureforthecompany'sperformance:themarketvalue
added(MVA).Thisiscalculatedas:
MVA=MVofthefirmCapital (3)
Where:
MVA

IstheFirmMarketValueAdded

MV

IstheFirmMarketValue

Capital

Isthecapitalinvestedonthefirmaftermakingthe
adjustmentsuggestedbySternStewart&Co

According to the theoretical side, there is a positive

relationshipbetweentheMVAofthecompanyanditsnet
EVA,Therefore,theMVAreflectthenetpresentvaluesof
theEVA,whichitisexpectedtoachieveinthefuture,For
example, in the case of a predicted steady economy, the

54

THERELATIONSHIPBETWEENECONOMICVALUEADDEDANDSTOCKRETURN,ANEMPIRICALSTUDYTOTEST
THETHEORETICALCLAIM

valueaddedofthecompanyinthefuture(withtheabsence
ofgrowth),theMVA,canbecalculatedasfollows(Peterson,
1997):

provides a new theory for all the problems of other

measurements. However, does not provide any
developmentoftheknownconceptsforprofiteconomic.

MVA=EVAK

The EVA measurement does not provide any practical

model that can be used for evaluating the stocks and
determiningthecompanyvalue.

(4)

Where:
K

IstheRequireRateofReturnwhichreflectsthecost
ofthecapital

Also,theSternStewartCompanyhasundertakenagreat
marketingcampaignfortheconceptofEVAmeasurement
andthevariousadjustmentsthatshouldbedoneonthenet
accountingprofitinadditiontothebrand(EVA),Theresults
ofthiscampaignhaveallowedthecompanytoexpandtoa
largernumberofcustomers,with300clientsrepresenting
facilitiesand,greatbusiness,withmanycompaniesaround
world. A set of statements for attracting customers (eye
catching statements), were also included in the
advertisements for the company. For example, the EVA
measureisthekeytocreatingwealthforshareholders,so
thetruemeasureofacompany'sperformanceistheEVA,
nottheearningspershareorreturnoninvestmentorreturn
onequityproperty.Stewart(19911994)saidproponentsof
themeasurethatanychangeinthevalueofthecompany
wasduetoachangeitsEVA(Tully,19931994).
Inaddition,totheclaimhecanusetheEVAchangesinthe
interpretation of the value of the company and its stock
returns better than traditional accounting standards
(Stewart,1994).
The spread of the concept of EVA and a high number of
customers(SternStewart&Co)totheemergenceofmany
performancemetricsofeconomiccompetitionmarketedby
differentcompanies,hasledthecompetitiontobenotedin
the newspapers and financial magazines. These called it
thewarscalesbetweendifferentcompanies,forexample,
the scale of Cash Flows Return on Investment rate
(CFROI),whicharemarketedby(HOLTValueAssociation
),theTotalBusinessReturn(TBR),whicharemarketedby
(Boston Consulting Group), Shareholders Value Added
(SVA) the Company (LEK /Aclar ),discounted economic
profitsforMarakonAssociates,andfinallyEconomicValue
managementKPMG.
Thetheatricalclaimshaveledtheimportanceofstandard
EVAinthecreationofshareholderswealth,andtheroleof
EVAintheinterpretationofstocksreturnandchangesin
themarketvalueofthecompany,tospreadtheconceptto
manypublicationsandbooksonperformancemeasuresof
internal and external accounting .in addition, there have
beencallstodisclosethemeasureofthevalueaddedof
thebusinessinsteadofcompaniesdisclosingearningsper
shareoftheprofit,andtheresultsofthebusinessandstock
performance reports in newspapers and financial
magazines (Zarowin 1995). Despite all this, there is a
logicalexplanationforthetheoreticalrelationshipbetween
theEVAandsharespricesandrevenues,butwhereisalso
criticismonthisscaleincluding:
ThemeasurementofEVAreliableonthevalueisreflected
inthehistoricalstatementsaccountsaftermakingvarious
adjustments.Itpresentsthehistoricaleventsbutdoesnot
reflecttheexpectationoftheEVAinthefuture.Therefore,
usingittodeterminethecompanyvalueandtoforecastthe
direction of stock price is not appropriate, because its
association expectation is related to the future not the
historicalevents.
Despite the significant publicity for the measurement of
EVA, it may convince many researchers to believe that it
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TocalculationofEVAneedsadjustmentonthenumberson
thefinancialstatements.Theseadjustmentsneedasetof
data,whichappearsontheseriesoffinancialstatementsIn
contrasttoresidualincomeandcanbecalculateddirectly
.Accordingtomanystudies(Biddleetal19971999),there
arenosignificantdifferencesandeffectsbetweenthevalue
of each of the residual income derived from Equation (1)
andtheEVAderivedfromEquation(2).Therefore,thereis
no theatrical value to these adjustments, which were
proposed by (Stern Stewart & Co) on the accounting
numberstomeasuretheEVA.
In addition to the criticisms on the theory to measure the
validityoftheuseofEVAtointerpretthechangesinstock
priceandrevenues,manyempiricalstudiesshowthefield
ofclaimsofthesupportersofthetheoreticalofmeasureof
EVA. (Biddle et al, 1997, 1999; Velez Pareja 2001;
Peixoto,2002)
Although the validity theory of the existence of the
relationship between EVA , the shares price, and value
exists the usefulness of any indicator of performance
measured by the presence of relationship the moral
processbetweentheindicatorandbehaviorofactualstock
prices on the securities market is unknown (Kothari,
2001).Therefore, the general objective of the study is an
empiricalinvestigationoftherelationshipbetweenEVAand
stock prices, and an analysis of the benefit of the use of
EVAinthedesignofinvestmentpoliciesthatcanbeused
toachieveextraordinaryreturns.Thiswilllookataprivate
data set of registered businesses in the stock market in
Egypt.
Toachievetheoverallobjective,thefirstpartofthestudyis
ananalysisofthefields,whichstudiesthepreviousprocess
intheselectionoftherelationshipbetweenthescaleofthe
EVA,stockpriceanddividends.Sectionthreeofpresents
theliteraturereviewofthestudywhilesectionfourpresents
the study hypotheses and section five deals with the
methodologyofthestudy.Thelastpartincludesasummary
ofresearchanditsresults.
AccordingtothetheoreticalrelationshipbetweentheEVA
andstockpricesandrevenues,thehighEVAgeneratedby
thefacilityincreasesitsvalue,andthusisreflectedinthe
highpricesofthesharesoftheseestablishedcompanies.
As the case of the validity of these allegations, the
theoreticalcompositionofinvestmentportfolioscontainsthe
sharesofenterpriseswithhighEVA,sowemustachieve
extraordinary returns compared to all the average market
returnsandreturnsonportfoliosthatcontainthesharesof
enterpriseswithlowEVA.
In addition, many studies have tested the relationship
between prices and earnings indicators of EVA and the
remainingincomeandaccountingindicatorsrecognizedas
dependentvariables.Oneoftheleadingstudiesinthisarea
hastargetedthetestingtherelationshipbetweentheEVA
ofalldividendsandthevalueoftheentity.Thestudytested
whether the data valueadded and value components of
thishelpexplainthestockreturnsandchangesinthevalue
ofthecompaniesmoredatafromtheaccountingprofitsor

55

THERELATIONSHIPBETWEENECONOMICVALUEADDEDANDSTOCKRETURN,ANEMPIRICALSTUDYTOTEST
THETHEORETICALCLAIM

not. The results of the study showed, that the profit

accountinghelpedininterpretingthereturnsstocksbetter
than all the data residual income and the EVA, also the
resultsindicatethatprofitscontributetotheinterpretationof
accounting earnings and the stock value of the business
greater than other economic scales, so this refers to the
futilityamendmentsproposedbySternStewart&Co.
Biddle et al. (1997) tested the same preexisting
relationshipsintheperiodfollowingtheappearanceofan
article (Tully 1993), which pointed out that the use of
standardvalueaddedeconomicistherealkeytocreating
thewealthofshareholders,andshowedthattheyhavehad
an high impact on the popularity of the concept of EVA
measure. The study tested the relationship by using the
606viewresultsandwasshownnosupporttothetheory
thattheallegationsrefertothesuperioritymeasurethatthe
EVA to the Metrology accounting in the interpretation of
changesinstockprices.
OByrne (1996) tested the relationship between stock
returnsandbetweenboththeEVAandnetoperatingprofit
after tax accounting. The results showed that the
accounting profits contributed to the interpretation of the
stockreturntoalesserextentthantheEVA,butthatthe
difference between the scales is not a factor (manor
reached33%oftherelationshipbetweenstockreturnand
EVA)..Thestudyconcludedthatthesescalesindicatean
increase in the contribution of standard EVA in the
interpretation of stock returns for traditional accounting
scales. The results of this study were criticized because
modificationswerecarriedoutwhentestingthescaleofthe
economicvalueandhedidnotmakethesameadjustments
when conducting an analysis of the relationship between
returnssharesandprofitaccounting.
BernsteinandPigler(1997)testedthepossibilityofusing
data with the EVA in the composition of investment
portfolios that seek normal returns, and that through the
formation of investment portfolios based on the data, the
EVA of the shares and trade policies is based on buying
highvaluestocksandsellingstockswithalowEVA.The
studypointedoutthatifweassumethetheoreticalvalidity
oftheclaimthatbusinessesthatachievehighEVAclaimto
increase the wealth of shareholders, the composition of
investment portfolios containing businesses that achieve
high EVA is supposed to achieve high rate of return
comparedwiththeaveragereturnsinthestockmarket.In
addition,theaverageyieldthatcanbeachievedbyusing
the investment policies is based on generally accepted
accounting indicators. The study of the composition of
portfoliosamongtheregisteredbusinessesintheNewYork
marketwascoveredbytheS&P500indexfortheperiod
from 1987 to 1997. The studys results showed that
contrarytoallegations,theuseoftheoreticalmeasuresfor
theEVAasabasisfortheselectionofbusinesspremises
withintheportfoliodidnotmakeanyunusualreturn.
Basedontheresultsofpreviousstudiesandthebusiness
registeredinthestockmarkets,itisclearthatmuchofthe
scientificevidencethatindicatesalackofhealth(Almzagm
theory)advocatingthesuperiorityofthemeasureofEVAin
explainingthebehaviorofpricesandreturnsofstockson
theindicatorsofaccountingpractices.Asindicatedinthe
results of these studies, amendments proposed by the
Stern Stewart & Co. are not feasible .On the accounting
figurestoreachtheEVA,salutingcontributionstoresidual
income calculated directly from the accounting figures
published after the deduction of the cost of capital,
expresses the changes in stock prices and returns more
thanthecontributionoftheEVA.
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Toachievetheoverallobjectiveofthestudyandbasedon
thebalanceoftheaccountingresearchinthefield,wetest
therelationshipbetweenstockpriceandearningsandthe
EVA.Inthispaper,wewilltesttwoassumptions.Thefirst
onewillmeasuretherelationshipbetweenthereturnson
sharesofbusinessesandtheEVAgeneratedbythistopic
installations,andaimstotestthevalidityoftheprosecution
theory that the businesses with high EVA lead to an
increase in the wealth of shareholders .Therefore, the
portfolio containing shares with high EVA is supposed to
achieve a high rate of return compared with the average
returns in the stock market .The hypothesis can be
formulatedasfollows:
Thefirsthypothesis:
Using the EVA to design the investment policies leads to
increasing normal returns on investment compare with
marketreturn.
Thesecondhypothesis:
TheuseofinvestmentpoliciesbasedontheEVAachieves
higheraveragereturnsthantheaveragereturnsachieved
by the investment policy based on generally accepted
accountingindicators.
Researchsamplewasselectedfromagroupofregistered
enterprisesinthestockmarketinEgypt.Thetermofstudy
included three years in the period from the beginning of
2005 to 2007. The study sample included over 40
businesses (23), representing the most active companies
according to the official bulletin of the Stock Exchange in
Cairo and Alexandria (17). And we can test the major
hypothesesforresearch,andachievetheoverallobjective
usingtheavailabilityofthefollowingdata:
1. Annualfinancialstatementsfortheyear2005(touse
thedatafornetaccountingprofitandthebookvalue
ofpropertyrights,andtocalculatetherateofreturn
onthepropertyrightsandthevalueoflongtermloans
andcosts).
2. Theannualdividendstoshareholdersandthedateof
distribution.
3. Stockpricesdailyenterprisegroupwasunderstudy
sincethebeginningof2005and2007toaccountfor
dividendsaccrueddailyandduringtheperiod.
4. Thedailyvaluefortheindextocalculatetheaverage
marketreturninthesameperiodofthestudy.
Thefollowingconditionsapplytodeterminethefinalsample
to search:
Usedatafromthefinancialstatementsofaccounting
atthebeginningofthestudyperiod.
Availability of data on daily closing prices for the
businessesunderstudy.
UsethedatafromEgyptstockmarketindex(CASE30).
Theapplicationoftheconditionsprecedenttotheexclusion
of three companies listed among the companies most
active in 2007, but that the date of registration of these
companiesinthestockmarketisarelativelyrecentdate.In
addition, that there is no series of integrated data on the
pricesoftradedsharesduringthestudyperiod.Therefore,
the final sample for the study included 28 companies
registeredinthestockmarket,givingatotalmarketvalue
of31.78billionpounds.Table1describesthecompanies
bythemarketvalueofthebusiness.

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THERELATIONSHIPBETWEENECONOMICVALUEADDEDANDSTOCKRETURN,ANEMPIRICALSTUDYTOTEST
THETHEORETICALCLAIM

The trimmed mean can be calculated after deducting the

highestandlowest5%fromallviews.
To measure the relationship between EVA and stock
return,andtotestthefirsthypothesisofthestudyandthe
private sectors policy adopted on the scale of EVA in
achieving extraordinary returns compared to market
returns,weusedthefollowingsteps:
1.
AccounttheEVAineachstocksampleunderstudy
andforthatovertheyearsofstudy.Duetothelack
of disclosure of the EVA, according to the
adjustmentsproposedbySternStewartthatrely
onthescaleofeconomicprofits(residualincome),
which can be calculated directing by using data
from published accounting lists , after the
authorities agreed the average cost of capital
(usingequation1),andhasbeencalculatedonthe
basisofrateofreturnwithoutrisk,inadditiontoa
premiumforrisk.
2.
Ordering the companies downward according to
theearningspershareoftheEVAinthebeginning
of the period. In addition, the composition of
investment portfolio contains a set of companies
that generate the highest EVA per share (the top
20%) and the theoretical claim assumed that the
investments create wealth to shareholders, and
therebyachieveahighrateofreturncomparedwith
theaveragemarketreturnduringthesameperiod.
Therateiscalculatedtoachievetheexpectedreturnonthe
propertyrightsasfollows:
RRR=RFR+Riskpremium
Where:
RRRIstherequiredrateofreturnachievedontheproperty
rights
RFR isthefreerateofreturnwithoutriskhasbeenused
rateofreturnontreasurybondsatthebeginningof
thestudyperiodasabasisfortherateofreturnrisk
free.
RiskPremiumisapremiumforrisk,despitethedifference
ofthepremium,accordingtoindustrytypeandsize
ofthefacilityreplacestheanalysis,theassumption
hasbeendeafeningsilenceaswellasoneforall
thecompaniesof4%.
3.Calculatingthedailyreturnsforallstocksonthesample
ofthestudyonbasisoverthestudyperiod(from01.01.2005
until31.12.2007),asfollows:
Rit=PitPit1+Dit(5)
where:
Rit
isthesharereturnontheanyday(i)
Pit
iscurrentsharepriceontheendofanyday(t)
Pit1
isthesharepriceonthepreviousday(t1)
Dit
theprofitdividend
4.
Calculatethedailyreturnofthestockmarketona
daily basis over the study period (from 1.1.2005
until31.12.2007)asfollows:
Rmt=(Mit Mit1)/Mit1 (6)
where:
Rmt
Themarketreturnontheday(t)andusingmarket
index(CASE30)tocalculateit

Mit Theindexvalueontheendofday(t)
Mit1Themarketindexvalueintheperfuseday(t1)
5. Collecting the daily returns on a monthly basis per
shareofthesampleandthemarketindexasfollows:
CRit=t=1t=kRit (7)
Where:
Crit Sumofsharereturnontheday(t)
K
Thetotaltimeofstudy(42months)
Rit Theshare(i)returnontheday(t)
Soweestimatetheaccumulatedreturnofthemarketindex
duringthestudyperiodusingdatamarketreturninsteadof
themarketreturn.
6. Compare portfolio returns on stocks with the highest
EVA.Averagemarketportfolioreturnsand,theability
tocomparetheextentofthisportfoliotodeterminethe
sectors (segments) in the market securities portfolio,
which can be used to achieve extraordinary returns
comparedtomarketreturn.
Totestthesecondhypothesisofthestudywecomparethe
returns generated by the investment policy based on the
scaleoftheEVA,withtherevenuesofinvestmentpolicies
basedonindicatorsofaccountingpractices,usingearning
multiplier indicator, which measures the relationship
between the share price in the period and earnings per
shareoftheprofit.Thisiscalculatedasfollows:
PE=PtEPS
PE EarningsMultiplier
Pt Sharepriceonthetime(t)
Theearningmultiplierhasbeencalculatedforalltheshares
ofenterprisessubjecttostudyatthebeginningofthestudy
period(1January2005)andtheinvestmentpolicydesigned
basedonthedataofearningmultiplierbyfollowingthese
steps:
1. Orderthecompaniesinoursampleinaccordanceto
the earning multiplier in the beginning of the period,
and the composition of investment portfolio contains
all the companies which meet minimum earnings
multiplier after the exclusion of companies with a
multiplier negative (minimum 20% of companies
according to the value earning multiplier). So the
investmentinthesecompaniesleadstoachievinghigh
investmentreturnscomparedwithanaveragemarket
andtherestofthefirmswithahighvalueofearning
multiplier.
2. Measuringthestockreturnforallcomponentsofthe
sampleunderstudyonadailybasisovertheperiodof
study (1.1 2005 to 31.12.2007) in accordance with
Equation (5) and to collect these revenues over the
studyperiod,usingtheequation(7).
3. Comparethestocksportfoliorevenuewiththelowest
earnings multiplier with the market portfolio average
returns, to measure the ability of these wallets to
identifysectorswithintheportfolioofsecuritiesmarket
that can be used to generate unusual revenues
comparedwiththemarketyield,Inaddition,compare
thereturnsontheportfolioreturnsequityportfoliowith
high EVA to determine the superiority investment

Numberof
views

mean

intermediate

Trimmedmean

Standard
error

Standard
deviation

Low
value

High
value

First
quarter

Third
quarter

40

1588

505

1202

404

2829

8.8

16590

162

1689

TableNo.1:Descriptiveanalysisofthecompaniesunderstudybythemarketvalueofthebusiness(valueinmillionEGP)

www.researchjournals.co.uk

57

THERELATIONSHIPBETWEENECONOMICVALUEADDEDANDSTOCKRETURN,ANEMPIRICALSTUDYTOTEST
THETHEORETICALCLAIM

policybasedonEVAfrominvestmentpoliciesbased
onacceptedaccountingstandards.
Totestthemajorhypothesesofthestudyandtoachieve
the overall objective our study has been divided in two
stages.Thefirststagemeasuredthereturnsachievedby
the stock's portfolio with high EVA and compared these
returns with those achieved by the stock market over the
period study. The aim of this stage was to test the first
hypothesis of the study. The revenues have been
estimateddailyandcollectedduringthestudyperiod.Table
2showstheresultsofthisstage.
1. The stocks portfolio with high EVA Achieved a
negative accumulated return over the period of the
study (43.8%), while the market index achieved a
negative return of 76.3% on the same period. The
averageannualyieldoftheaggregatestocksportfolio
with high EVA 14.38%, whiles the average for the
marketportfoliowas(21%).Inspiteofachievinga
negative return for each of the portfolios, the
performanceofthestocksportfoliowithhighEVAwas
superior to the market performance during the study
period.

the lowest earning's multiplier. Average returns on the

marketportfoliowerethencomparedwiththeaveragereturn
onportfoliowithhighEVA.Table2showstheresultsofthis
step:
1.

Thestocksportfoliowiththelowestearnings'multiplier
istheonlyonethathasachievedapositivereturnon
accumulated during the study period, and the
percentageis2.5%,comparedtoanegativereturnof
43.8%,forthestocks'portfolioofwithhighEVA.The
benchmarkmarketreturnreachedanegativeof76.3%
forthesameperiod.Thisreferstobeoutperformedfor
thestockportfoliowiththelowestmultipleofearnings
tothestockportfolioperformancewithhighEVAand
theaveragemarketreturn.

2.

The average annual return for the aggregate stocks

portfoliostockswiththelowestearningsmultiplierwas
+1.15%,whilethestocksportfoliowithhighEVAhasa
negativeaverageaccumulatedannualreturn2.04%,
and the market portfolio reached the average of

Months

Marketindex Portfolioofstocks
CASE
withhighEVA

Portfolioofstock
withthelowest
multiplierof
earning

2. The stocks' portfolio with a high EVA achieved an

accumulated return on the period of first year was
24.5%,whilethetotalreturnforthemarketindexwas
43.1%.themarketportfoliohadanegativereturnof
82.1%and76.3%ontheretentionperiodof24and
36months,respectively,Administrating,andsalesof
portfolio stocks of EVA gave high negative revenue
during the same period of 51.7% and 43.8%,
respectively.Sothisresultsupportsthestockportfolio
withhighEVAratherthanthemarketportfolio.

2.5

0.8

4.2

4.7

5.8

3.2

4.5

7.3

0.6

3.5

10.8

3.1

15.5

11.9

5.3

15.9

12.7

7.1

25.3

18.3

14.1

38.3

16.2

15.3

41.2

16.7

8.2

3. Theretainedearningsfortheperiodof24months(the
period between 12 months and 36 months) for the
market portfolio was 28.5%, while the aggregate
return for the stock's portfolio with high EVA for the
sameperiodwas19.7%).

10

54.2

24.6

12.6

11

48.8

23.0

11.8

12

43.1

24.50

13.8

13

42.5

27.7

11.6

14

54.0

35.7

15.6

15

61.9

40.2

21.7

16

53.6

41.8

22.9

17

51.7

34.5

18.4

18

60.5

32.5

19.6

19

71.6

34

19.9

20

53.4

27.8

16.4

21

67.3

35.2

13.8

22

66.4

40.6

17.0

23

73.5

52

19.8

24

82.1

51.7

18

25

86.9

62.4

17.7

26

77.5

51.7

15.7

27

78.9

44.2

13.9

28

81.8

45.4

8.1

29

83.1

46.6

3.3

30

82.2

47.9

5.3

31

84.1

47.3

0.1

32

80.5

43.2

0.4

33

84.1

43.7

0.0

34

81.1

45.4

1.1

35

79.5

48.1

1.5

36

76.3

43.8

2.5

4. ThestockportfoliowithhighEVA,startedachievinga
positive accumulated return during the third year of
study. The value of this revenue is +10%, while the
marketindexachievedapositivereturn+3.6%during
thesameperiod.
The previous results shows the market index achieved a
negativerevenuegreaterthanthenegativeyieldmadeby
the stocks portfolios with high EVA .This may indicate a
benefit of the composition of portfolios based on EVA,
however,inthecaseforthemarkettrendtoincreasethe
yieldfortheequityportfolio,theEVAreturnissignificantly
lowerthanthemarketreturn.Itcanbeexplainedbythese
results, the systemic risk for shares with high EVA and
marketriskwasloweredtherefore,changesinthepricesof
thesestocksandtheirreturnsarelessthanchangesinthe
marketindexbothinthecaseofariseoradeclinesothe
return(positiveornegative)fortheinvestigatoroftheshares
withhigheEVAisalwayslessthanthemarketreturn.In
general, the previous results did not support the first
hypothesis of the study, which aimed to test the theory
allegationswhichreferredtotheuseoftheEVAtodesign
theinvestmentpoliciesconducivetoextraordinaryreturns
compared to market return. The second aim of our study
wastocomparethereturnachievedbyinvestmentpolicies
basedontheindexearningmultiplierandreturnsachieved
by the investment policy adopted on the EVA. So we
measured the returns earned for the stocks portfolio with
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TableNo.2:CumulativeHoldingPeriodReturnsin%.Duringthe
studyperiod(stocksportfoliowithahighEVA).

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THERELATIONSHIPBETWEENECONOMICVALUEADDEDANDSTOCKRETURN,ANEMPIRICALSTUDYTOTEST
THETHEORETICALCLAIM

3.1%. This result supports the outperformed of the

stocksportfoliowiththelowestmultiplecomparedwith
therestoftheportfolios.
3.

4.

Theaggregatereturnofthestocksportfoliowiththe
lowest earnings multiplier of the ratios was 13.8%,
18% and 2.5% ,respectively for a period of 12
months,24monthsand36monthsinarow,Thiswas
abetterreturnthanthereturnachievedforeachone,
thestockportfoliowithhighEVAandmarketportfolio
overthesameperiod.
Thestockportfoliowiththelowestearningsmultiplier
started to have a positive earnings return during the
third year of the study The value of this return was
14.7%,whilethe revenue of the stocks portfolio with
high EVA in the same period was +11%, while the
market index achieved a positive return was 1.6%
duringthesameperiod.Theseresultsindicatethatthe
superiority of the portfolio based on the earning
multiplier index overall was better than the
performanceofthemarketportfolioandstockportfolio
withhighEVA.Therefore,uselessinvestmentpolicies
arebasedonEVA.Finally,thepreviousresultsdidnot
support the second hypothesis of the study, which
aimed to test the veracity of the theoretical claims,
which referred to the benefit of the using the
investmentpoliciesbasedonthescaleoftheEVAto
achieveanaveragerevenuegreaterthantheaverage
returns achieved by the investment policy based on
the generally accepted accounting indicators, This
alsosupportstheresultsofapreviousstudiesonthe
phenomenonofearningmultiplier.

The EVA measurement is based on the concept of

economic profits, which indicates that in order to achieve
thevalueforshareholders;thefirmmustmanagetheuse
oftheavailableresourcestoachieveareturnoninvested
capitalgreaterthanthecostofcapital,whetherownedor
Borrowed.
Ourresearchaimedtoanalyzeandstudytheseallegations
and to provide an evidence of the benefit of the EVA, to
interpretthestockreturns.Wetriedtostudyandanalysis
the relationship between a stock return and EVA,
addressedtheextentofthebenefitoftheinvestmentpolicy
relyingontheEVAinachievingnormalreturnscompared
with each one the average market and average returns
achieved by the investment policy based on accounting
indicators.ThestudyresultsshowedthattheEVAprovided
a small interpretation for the stock returns, and indicated
that the composition of investment portfolios containing
shares with a high EVA does not necessary lead to
high returns compared with market return. Furthermore,
theseresultsagreedwiththepreviousstudies,whichtested
thisrelationshipinthestockmarketsandthebenefitofthe
investmentpoliciesadoptedtomeasuretheEVAcompared
with the average market return and average return
achievedbythepoliciesadoptedindicatorsofaccounting.
The results showed the invalidity of the theory that the
allegations refer to the benefit of the use of investment
policies based on the EVA to achieve average returns
greater than the average returns achieved by the
investment policy based on accepted accounting
indicators.Theresultsshowedthattheinvestmentpolicies
based on the conventional accounting indicators were
superiortothosepoliciesbasedontheEVA.Inaddition,
theresultsshowedthepossibilityofusingtheinvestment
policy based on generally accepted accounting indicators
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toachievingupnormalreturnscomparedwiththeaverage
marketreturn.Ourresultsareconsistentwiththeresultsof
previous studies. In general, the results of our study
provide practical evidence added to the accumulated
resultsofthepreviousstudies,whichreferstothelackof
veracityofthetheoryclaimsrelationshipbetweentheEVA,
stockpricesandstocksreturns.
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