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Article: Evidence on EVA®

TitleEvidence on EVA®
Authors
Issue Date1999
PublisherBlackwell Publishing, Inc. The Journal's web site is located at http://www.blackwellpublishing.com/subs.asp?ref=1078-1196
Citation
Journal of Applied Corporate Finance, 1999, v. 12 n. 2, p. 69-79 How to Cite?
AbstractEVA has attracted considerable attention as an alternative to traditional accounting earnings for use in both valuation and incentive compensation. With a host of consultants now marketing related metrics, numerous claims have been made—most based on anecdotal evidence or in-house studies. This paper summarizes the authors' independent evidence regarding EVA's alleged advantages. The authors begin by reviewing the theory that links the underlying concept of residual income to shareholder value. Second, they discuss how Stern Stewart modifies residual income to produce its proprietary EVA metric and show how median EVA compares with residual income, net income, and operating cash flows over the period 1988–97. Third, they examine the claim that EVA is more closely associated with stock returns and firm value than is net income. Their evidence indicates that EVA does not dominate net income in associations with stock returns and firm values. Fourth, they examine a second claim that compensation plans based on residual income motivate managers to take actions consistent with increasing shareholder value. Here the evidence (from a study by Wallace) suggests that managers do respond to residual income-based incentives by, for example, increasing asset sales, cutting capital expenditures, repurchasing stock, and producing higher levels of residual income. The authors conclude by arguing that a metric such as EVA can be effective for internal incentive purposes even if it conveys little news to market participants regarding the firm's valuation.
Persistent Identifierhttp://hub.hku.hk/handle/10722/128979
ISSN
SSRN

 

DC FieldValueLanguage
dc.contributor.authorBiddle, GC-
dc.contributor.authorBowen, RM-
dc.contributor.authorWallace, JS-
dc.date.accessioned2010-12-01T03:35:09Z-
dc.date.available2010-12-01T03:35:09Z-
dc.date.issued1999-
dc.identifier.citationJournal of Applied Corporate Finance, 1999, v. 12 n. 2, p. 69-79-
dc.identifier.issn1078-1196-
dc.identifier.urihttp://hub.hku.hk/handle/10722/128979-
dc.description.abstractEVA has attracted considerable attention as an alternative to traditional accounting earnings for use in both valuation and incentive compensation. With a host of consultants now marketing related metrics, numerous claims have been made—most based on anecdotal evidence or in-house studies. This paper summarizes the authors' independent evidence regarding EVA's alleged advantages. The authors begin by reviewing the theory that links the underlying concept of residual income to shareholder value. Second, they discuss how Stern Stewart modifies residual income to produce its proprietary EVA metric and show how median EVA compares with residual income, net income, and operating cash flows over the period 1988–97. Third, they examine the claim that EVA is more closely associated with stock returns and firm value than is net income. Their evidence indicates that EVA does not dominate net income in associations with stock returns and firm values. Fourth, they examine a second claim that compensation plans based on residual income motivate managers to take actions consistent with increasing shareholder value. Here the evidence (from a study by Wallace) suggests that managers do respond to residual income-based incentives by, for example, increasing asset sales, cutting capital expenditures, repurchasing stock, and producing higher levels of residual income. The authors conclude by arguing that a metric such as EVA can be effective for internal incentive purposes even if it conveys little news to market participants regarding the firm's valuation.-
dc.languageeng-
dc.publisherBlackwell Publishing, Inc. The Journal's web site is located at http://www.blackwellpublishing.com/subs.asp?ref=1078-1196-
dc.relation.ispartofJournal of Applied Corporate Finance-
dc.rightsThe definitive version is available at www.blackwell-synergy.com-
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleEvidence on EVA®en_HK
dc.typeArticleen_HK
dc.identifier.emailBiddle, GC: biddle@hku.hk-
dc.description.naturepreprint-
dc.identifier.doi10.1111/j.1745-6622.1999.tb00008.x-
dc.identifier.volume12-
dc.identifier.issue2-
dc.identifier.spage69-
dc.identifier.epage79-
dc.publisher.placeUnited States-
dc.identifier.ssrn178168-

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