Economic value-added or EVA is a common metric that quantifies the value of the firm. However, recent studies that examine portfolio investment strategies using EVA suggest that portfolios formed with negative EVA earn relatively higher returns compared to some positive EVA firms. This study investigates whether firms with current negative EVAs perform well in the future. A sample of firms with negative EVAs in 2003 is identified, then four portfolios are formed by ranking firms from the most negative to the least negative EVAs. The returns of the four portfolios are tracked from 2004 through 2009 and correlated to four accounting variables, return on assets (NOPAT/TA), market-to-book ratio (MTB), leverage, and size. The results indicate that the firms with lower leverage ratio exhibit higher portfolio returns. Furthermore, firms in the categories defined as the least negative EVA and the second least negative EVA are able to turn around and generate positive abnormal returns.
Stoyu Ivanov, Kenneth Leong, and Janis Zaima. "An Empirical Examination of Negative Economic Value Added Firms." Faculty Publications (2014).