A Fresh Look At Economic Value Added: Empirical Study Of The Fortune Five-Hundred Companies

Abstract

Rapid and complex changes in the economic and business environment are posing serious challenges to today’s business executives. Meeting these challenges requires effective measures for control and performance evaluation. This article focuses on the uses, benefits and limitations of economic value added (EVA) as a value creation measure. Calculation of this trendy measure is complicated because of the many adjustments needed to convert the generally accepted accounting principles (GAAP) based income to economic income. The article compares the performance of EVA user companies with non-user Fortune 500 companies for the years 1997 and 1998. It shows that users performance means profits as percentage of revenues, assets, and stockholders’ equity were higher than the means of non-users. However, the means for 1998 earnings per share (EPS), EPS change from 1997 and EPS growth for the years 1988-1998 were lower for the EVA user companies. EVA will become less popular in its use as an instrument of control and performance evaluation. Therefore, the conclusion of this research is not in support of EVA use as a measure of value creation to stockholders.

Economic value added and shareholders' wealth creation: the portrait of a developing Asian country

“…However, there exist anomalies in the academic literature about the number of adjustments required to reach economic profit and economic capital. Various researchers (Abdeen and Haight, 2002;Kaur and Narang, 2009;Dubey, 2000 etc. Stern-Stewart and Company had suggested 164 such accounting adjustments to convert Generally Accepted Accounting Principles (GAAP) profits to economic profits (Weaver, 2001).…”

Economic value added in function of determining incentive compensation systems

“…"EVA emphasizes the residual wealth creation in a company after all costs and expenses have been charged including the firm's cost of capital invested. In its simplest terms, EVA measures how much economic value in dollars; the company is creating, taking into account the cost of debt and equity capital" (Abdeen and Haight, 2002). EVA can be defined as the change in the NOPAT (Net Operating Profit after Taxes) minus the change in the Cost of the Capital used to generate this NOPAT (Rappaport, 1998;Kumar and Kaura, 2002).…”

“…Because of that, a certain adjustments will have to be made in order to rectify any possible accounting distortions of income and investment. Examples of adjustments include research and development expenditures, and employee training costs that more correctly should be capitalized and amortized over their perceived years of future benefits (Abdeen and Haight, 2002). Besides this, it is also important to define the cost of capital, which is one of the most complex parts of EVA calculation.…”

“…The fact that several adjustments have to be made in order to calculate economic income makes this performance metric complex. In some cases the number of adjustments may reach over one hundred and fifty (Abdeen and Haight, 2002). The complex calculation of EVA made author Ilić (2011) who for the first time showed calculation of EVA in the company business practices of Serbia.…”

“…EVA is appealing to developing companies that need to fund their projects through satisfying the value enhancement requirements of investors (Abdeen and Haight, 2002) and it is in function of value creation and enlargement for shareholders (Zakić et al, 2012;Ilić, 2011;Malinić, 2007;Balsey, 2005;Evans and Evans, 2002;Young and O'Byrne, 2001;Stern et al, 2001;Wallace, 1997). But one of the most important facts is that implementation of EVA into performance management system is that it can improve an incentive systems for managers.…”