MVA and the Cross-Section of Expected Stock Returns

Abstract

The authors examine the cross–section of expected stock returns between 1985 and 1994 and find a strong negative relationship between market value added per share (MVA) and average returns. When the joint effect of MVA, firm size, and the ratio of price–to–book value is examined, the explanatory power of size and the price–to–book value for the cross–section of average returns is substantially diminished, but MVA is still strongly related to returns. These results suggest three possibilities: that MVA is serving as a proxy for a risk factor that affects equilibrium expected returns, that current poor performance will be reversed in the future as the mean–reverting hypothesis suggests, or that low MVA firms are relatively underpriced.