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)

Most of the previous studies examine the efficiency of EVA versus accounting measures as a periodic performance measure. There is hardly any study conducted on examining and comparing the efficiency of EVA based valuation model with the earnings valuation model. However, this study examines and compares the efficiency EVA valuation with earnings valuation by conducting relative information content analysis across the years and on a year-wise basis.It is observed that future growth value is the only difference between the two valuation models. This study further examines whether future growth value plays a significant role in increasing/decreasing the explanatory ability of EVA based valuation model compared to the earnings valuation model by conducting incremental information content analysis. It conducts both the analyses by using the sample data of 69 large-cap, 88 mid-cap and 79 small-cap companies over the period 2002-17. The relative information content analysis conducted across the years reveals that large and small-cap companies respond better to the earnings valuation model, whereas mid-cap companies respond better to EVA based valuation model. The incremental analysis reveals that future growth value plays a significant role in increasing the decreasing explanatory ability of the EVA valuation model. The analysis conducted yearwise manner also supported the fact.

After publication of this article [1], it is reported this article contained an error in the section ‘Risk-free return (rf)’