Abstract Both the rise of hostile takeovers and the phenomenal success of LBOs in the 1980s can be explained in part as capital market responses to the shortcomings of the top‐down, EPS‐based model of financial management that has long dominated corporate America. the EVA financial management system, which presents the 1990s most serious challenge to the dominance of the EPS model, borrows important aspects from the LBO movement, particularly its focus on capital efficiency and ownership incentives. Unlike the LBO movement, however, the EVA system accomplishes such goals without the high leverage and concentration of risk that limit LBOs to the mature sector of the US economy.
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