MVA and the cross-section of expected stock returns -: A strong negative relationship between MVA per share and average returns.

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.