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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Aurelija Griskaite, Rainer Lueg ORCID logo


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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: Earnings Less Risk-Free Interest Charge, Relative Information Content, Incremental Information Content, Economic Value Added, Shareholder Value, Value-Based Management

Authors’ individual contribution: Conceptualization — R.L.; Methodology — R.L.; Software — A.G.; Validation — A.G. and R.L.; Formal Analysis — A.G.; Investigation — A.G.; Resources — R.L.; Data Curation — A.G.; Writing — Original Draft — A.G.; Writing — Review & Editing — R.L.; Visualization — A.G. and R.L.; Supervision — R.L.; Project Administration — R.L.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

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

JEL Classification: M10, M20, M41

Received: 19.09.2022
Accepted: 10.02.2023
Published online: 13.02.2023

How to cite this paper: 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 & Control, 20(2), 166–181. https://doi.org/10.22495/cocv20i2art14