Modelling traditional accounting and modern valuebased performance measures to explain stock market returns in the Athens Stock Exchange ASE

Purpose The purpose of this paper is to investigate the explanatory power of two valuebased performance measurement models, Economic Value Added EVA and shareholder value added SVA, compared with three traditional accounting performance measures earnings per share EPS, return on investment ROI, and return on equity ROE, in explaining stock market returns in the Athens Stock Exchange ASE. Designmethodologyapproach The paper uses the Easton and Harris formal valuation model and employs both a relative and an incremental information content approach to examine which performance measure best explains stock market returns and the explanatory power of the pairwise combinations of one valuebased performance measurement model and one traditional accounting performance measure in explaining stock market returns. For this purpose, pooled timeseries, crosssectional data of listed companies in the Athens Stock Exchange ASE over the period 19922001 have been collected and modelled. Findings Relative information content tests reveal that stock market returns are more closely associated with EPS than with EVA or other performance measures. However, incremental information content tests suggest that the pairwise combination of EVA with EPS increases significantly the explanatory power in explaining stock market returns. Practical implications The results suggest that the market participants in the Greek stock market should pay additional attention to EVA but they should also consider other determinants to develop their investment strategies. Originalityvalue The paper is one of the first studies on the value relevance of traditional accounting EPS, ROI, and ROE and valuebased EVA and SVA performance measures in explaining stock market returns in the ASE. The results extend the understanding of the role of EVA and SVA in explaining stock market returns in the ASE, and, moreover, whether they may affect investors' decisions in a continental European market with market characteristics similar to that of Greece.