An Analysis of EVA and Other Measures of Firm Performance Based on Residual Income

Residual income and value creation: An investigation into the lost-capital paradigm

“…The following Proposition shows that the KEP enjoys the important property of goal congruence: every residual income has the same sign as the NPV (see Martin et al, 2003) Proposition 8. The KEP has the same sign as the net value N t .…”

“…It is widely known that the sum of these uniperiodic NPVs is just the project's NPV: Peasnell, 1981Peasnell, , 1982Peccati, 1987Peccati, , 1989Martin and Petty, 2000;Lundholm and O'Keefe, 2001;Martin et al 2003;Vélez-Pareja and Tham, 2003;Ohlson, 2005).…”

Splitting up value: A critical review of residual income theories

“…The theoretical equivalence of the RI-based metrics and the NPV (the above mentioned conservation property), is well-established and often reproposed in the literature (Martin and Petty, 2000;Lundholm and O'Keefe, 2001;Fernández, 2002;Martin, Petty, and Rich, 2003;Vélez-Pareja and Tham, 2003), and it has been shown to be valid for portfolio of projects as well (Peccati, 1991; see also Reichelstein, 1997). However, the implementation of the RI-based metrics in real-life applications often result in valuations not consistent with the cash-flow-based approach.…”

“…As for the latter, a common compensation plan is based on a bonus bank system which makes the bonus earned by the manager equal to the sum of a target bonus plus a fixed percentage of excess EVA improvement. Such a bonus is credited to a bonus "bank" and the balance of the bonus bank determines the bonus paid (Martin and Petty, 2000;Young and O'Byrne, 2001;Martin, Petty and Rich, 2003). Beside EVA, a multitude of metrics have been put forward in the last twenty years (Stewart, 1991), among which the Oil&Gas Adjusted EVA purported by McCormack and Vytheeswaran (1998);…”

“…While the origins of the notion trace back to the 19th century, in-depth theoretical investigations and widespread real-life applications are relatively recent and concern an interdisciplinary field connecting management accounting, corporate finance and financial mathematics (Peasnell, 1981(Peasnell, , 1982Peccati, 1987Peccati, , 1989Peccati, , 1991Stewart, 1991;Ohlson, 1995; Arnold and Davies, 2000;Young and O'Byrne, 2001;Martin, Petty and Rich, 2003). This paper presents both a historical outline of its birth and development and an overview of the main recent contributions regarding capital budgeting decisions, production and sales decisions, implementation of optimal portfolios, forecasts of asset prices and calculation of intrinsic values.…”