Does the market value earnings of firms that are generated from financial leverage? The case of the health care industry
This paper sets forth a proposition that firms with debts be encouraged or required to disclose the unlevered EPS, which is derived by purging out the portion of earnings contributed by financial leverage. This alternative measure of earnings, which is referred here as zero leverage EPS or unlevered EPS, can provide a clearer focus on earnings which are purely performance related. This paper describes a statistical study for the health care industry which shows that stock return bears a stronger correlation with change in unlevered EPS than with the change in standard accounting EPS, thereby highlighting the merit of disclosing the unlevered EPS to stakeholders as an additional information for a more precise evaluation of pure operating performance of the firm.