Question

What could account for the fact that the firm’s economic value added and ROIC was positive and significantly greater than their peer firm in 2019, while the firm’s abnormal stock return compared to their peer was negative in 2019?

Answer 1

Stock return is not always moving in synchronisation with economic value added of the company because economic value added is representative of the rate of return which has been generated by the company which is in excess of the shareholders required rate of return, but it will not mean that these rate of return are going to transpire into share price increased so it can be said that share price cannot be following the rate of return of the economic value added.

Hence, it can be said that return on invested capital and economic value added can be higher for a company but the overall stock return cannot follow the value addition of the company because investors are interpreting the performance of a company in the different manner and hence it can be said that the performance in terms of stock returns can be different and lower than other companies even after generation of higher value.