Review of Quantitative Finance and Accounting, 18: 59–73, 2002  C 2002 Kluwer Academic Publishers. Manufactured in The Netherlands. Economic Value Added, Future Accounting Earnings, and Financial Analysts’ Earnings Per Share Forecasts SUSAN M. MACHUGA ∗ University of Massachusetts, Boston E-mail: suemach@aol.com RAY J. PFEIFFER, JR. University of Massachusetts, Amherst KIRAN VERMA University of Massachusetts, Boston Abstract. Empirical research to date on the relative effectiveness of Economic Value Added (EVA) and earnings per share (EPS) as measures of firm performance for stock valuation has been mixed. In contrast to prior research, which primarily focuses on the correspondence of these measures with shareholder value and changes therein, we examine their relative effectiveness in predicting future earnings and their role in enhancing the accuracy of analysts’ forecasts. Our results indicate that EVA contains information that is incremental to EPS in predicting future earnings. In addition, we find that despite this potential for EVA to add incremental value to analysts’ forecasts of future earnings, analysts do not use the information in reported EVA appropriately, but appear rather to overweigh it. Key words: economic value added, financial analysts’ forecasts, earnings-per-share predictions JEL Classification: M41, G10 1. Introduction In recent years, there has been increasing attention paid to new financial performance measures as substitutes for traditional accounting-based earning per share measures (Ittner and Larcker, 1998). One particular measure that has received substantial attention in the financial press and in the academic literature is Economic Value Added (EVA). It has been argued that many companies have adopted EVA as a measure of firm performance, as an analytical tool to make portfolio selection decisions, and as a management discipline (Teitelbaum, 1997). 1 ∗ Address correspondence to: Susan M. Machuga, Department of Accounting and Finance, College of Management, University of Massachusetts, Boston, 100 Morrissey Blvd., Boston, MA 02125-3393. Tel.: (860) 871-8124; Fax: (860) 871-8124. E-mail: suemach@aol.com