- EVA Momentum and EVA Growth, two of the EVA-based metrics defined by ISS, demonstrated a market-wide correlation coefficient to TSR of 0.26 and 0.24, respectively. Those coefficients are only slightly higher than Sales Growth (0.23) and EPS Growth (0.21). Further, EBITDA Growth was substantially more correlated to TSR with a coefficient of 0.41 across all companies.
- For companies in the energy and real estate investment trust industries, the correlations declined markedly. Both EVA metrics demonstrated a negative correlation to TSR for the energy industry and less than 0.1 for real estate, reflecting longer profit cycles for capital investments in those industries.
The report highlights the possibility of “false negatives” when comparing EVA and TSR for companies in the ISS methodology, since companies may well show positive or even outperforming TSR but poor EVA. While a metric such as EBITDA growth is well understood, ISS’s version of EVA is an internal, proprietary product for the proxy advisor and companies may be left in the dark as to how their score was derived without in-depth disclosure from ISS, or purchasing ISS Corporate Solutions consulting services.