Value Based Management: Economic Value Added or Cash Value Added?

Abstract:     
What we use today to follow up a company's profitability and value creation is inconsistent with the capital market's mechanism, and what the market considers determines value--it is therefore imprecise and irrelevant. The accounting used will not any longer be a sufficient provider of financial information. Companies will experience a demand for more precise tools, both when it comes to metrics and the tool's ingredients (relevance) due to the increasing activity among shareholders/investors. The relevance in financial management must be dramatically improved. Companies must now identify the Value Based Management (VBM) concept that will best initiate a higher degree of Shareholder Value awareness in the company. A true VBM framework is consistent with the market's mechanism and our four factors that, according to the capital markets, determine value. The metric must be precise and relevant. Not random and irrelevant as accounting is today as a decision base.

This paper deals with the two VBM frameworks Economic Value Added (EVA?) and Cash Value Added (CVA?). Many things are being said about the two frameworks. I will in this paper present the result from my research and thinking surrounding the differences and similarities between them. The Cash Value Added framework discussed in this paper refers to the concept developed by Erik Ottosson and Fredrik Weissenrieder. The Economic Value Added framework discussed in this paper refers to the concept developed by Bennett Stewart.

JEL Classifications: G12, G31, M40, M41, M46

Working Paper Series