Economic value added: some empirical evidence

Abstract

Like all corporate buzzwords, 'economic value added' combines some truth with some chaff. This article presents recent empirical evidence that helps to sort them out. Long known as 'residual income' economic value added has been marketed successfully by consultancies in recent years as a management incentive tool. Stern Stewart & Co. has been particularly aggressive in trademarking their version of EVA and by making claims regarding its performance. Independent examination suggests that some of these claims are overstated. While evidence confirms that managers respond to EVA incentives, there is not evidence thus far to support claims that EVA is more closely associated with equity returns or firm values than is net income. Possible reasons are discussed.