Journal ArticleParallel publicationPublished version DOI: 10.48548/pubdata-1440

Earnings less risk-free interest charge (ERIC) and stock returns: ERIC’s relative and incremental information content in a European sample

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Date of first publication2023-02-13
Date of publication in PubData 2024-11-11

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English

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Variant form of DOI: 10.22495/cocv20i2art14
Griskaite, A., Lueg, R. (2023). Earnings less risk-free interest charge (ERIC) and stock returns: ERIC’s relative and incremental information content in a European sample. Corporate Ownership and Control, 20(2), 166-181.
Published in ISSN: 1810-3057
Corporate Ownership & Control

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Abstract

This study tests the information content of earnings less risk-free interest charge (ERIC) and analyses its ability to explain fluctuations in market-adjusted stock returns. Following Biddle et al. (1997) study design, we perform relative and incremental information content tests. Relative information content tests reveal that mandatory reporting metrics — such as earnings before extraordinary items (EBEI), cash flow from operations (CFO), and total comprehensive income (TCI) — are more highly associated with stock returns and firm values than ERIC or residual income (RI). A number of sensitivity analyses support our findings. To test incremental information content, we split ERIC into five components. Primary results indicated that components specific to ERIC — changes of net assets, after-tax interest expenses, and capital charge — do not add relative information content. Yet, sensitivity tests suggest that some ERIC components add incremental information, especially when accounting for market expectations. However, these findings are not economically substantial compared to CFO and EBEI. Overall, we conclude that mandatory metrics generally outperform ERIC and residual income. Our unique contribution lies in applying the established methodology of measuring economic value added (EVA’s) relative and incremental information content to ERIC.

Keywords

Shareholder Value; Value-based Management

Notes

This publication was funded by the German Research Foundation (DFG).

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