Economic value added: some empirical EVAdence

Gary C. Biddle · Robert M. Bowen

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Financial Reporting and Valuation Research Corporate Finance and Governance Accounting and Organizational Management

Abstract

Traces the growth in the use of economic value added (EVA, previously known as residual income) and uses two previous research studies to assess some claims for its merits. Compares EVA's ability to explain stock returns with that of earnings before extraordinary items (EBEI) and cash flow using 1984‐1993 US data; and finds EBEI is most closely related. Examines EVA's incentive effects on management investing, financing and operating decisions and shows that, although EVA users decreased new investment, increased dispositions of assets, increased share repurchases, used assets more intensively and increased residual income, market reactions to this were weak. Suggests possible reasons for this and concludes that EVA may align management incentives with shareholders' interests but this does not necessarily increase shareholder value.

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References

1991Earnings Asan Explanatory Variable for Returns 1997Does EVA® beat earnings? Evidence on associations with stock returns and firm values 1995Relative versus incremental information content 1996EVA® AND MARKET VALUE 1994EVA™: FAST AND FANTASY 1991The Estimation and Determinants of Associations between Returns and Earnings: Evidence from Cross-Industry Comparisons 1990Accounting information and corporate governance

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2021Financial performance index of IPO firms using VIKOR-CRITIC techniques 2011Association of EVA and accounting earnings with market value: evidence from India 2015The impact of performance measures, leverage and efficiency on market value added: Evidence from Iran 2011Further evidence on relative and incremental information content of EVA and traditional performance measures from select Indian companies 2008Evaluating value based financial performance measures

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