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Looking at the Evidence

Given the many and often divergent definitions of a good company, it should not be surprising that the evidence also has to be categorized by the definition used. You will begin this section by looking at the evidence on the relationship between the excess returns earned on projects by firms and returns earned on the stocks of these firms. You will follow up by examining whether stronger corporate governance or social consciousness translates into higher stock returns for investors. You will close the section by examining how services that rank companies according to quality, presumably using a combination of factors, do when it comes to finding good investments.

Project Quality and Stock Returns

Will increasing economic value added cause market value to increase? While an increase in economic value added will generally lead to an increase in firm value, it may or may not increase the stock price. This is because the market has built into it its expectations of future economic value added. Thus, a firm like Microsoft is priced on the assumption that it will earn large and increasing economic value added over time.


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