Abstract

http://ssrn.com/abstract=178168
 
 

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Evidence on EVA


Gary C. Biddle


The University of Hong Kong

Robert M. Bowen


University of San Diego - School of Business; University of Washington - Foster School of Business

James S. Wallace


Claremont Colleges - Peter F. Drucker Graduate School of Management


Journal of Applied Corporate Finance, Vol. 12, No. 2, Summer 1999

Abstract:     
Economic Value Added (EVA) 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 independent evidence regarding EVA's alleged advantages. We begin by reviewing the theory that links the underlying concept of residual income to shareholder value. Second, we 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, we examine the claim that EVA is more closely associated with stock returns and firm value than is net income. The evidence indicates that EVA does not dominate net income in associations with stock returns and firm values. Fourth, we examine a second claim that compensation plans based on residual income motivate managers to take actions consistent with increasing shareholder value. Here, the independent evidence suggests that managers do respond to residual income-based incentives. Finally, we discuss how a metric such as EVA can be useful for internal incentive purposes even if it conveys little news to market participants regarding the firm's valuation.

Number of Pages in PDF File: 27

JEL Classification: M41, M46, G12, G14, G30, M33

Accepted Paper Series


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Date posted: September 20, 1999  

Suggested Citation

Biddle, Gary C. and Bowen, Robert M. and Wallace, James S., Evidence on EVA. Journal of Applied Corporate Finance, Vol. 12, No. 2, Summer 1999. Available at SSRN: http://ssrn.com/abstract=178168 or http://dx.doi.org/10.2139/ssrn.178168

Contact Information

Gary C. Biddle
The University of Hong Kong ( email )
1213 KK Leung Building
Pokfulam
Hong Kong
China
+852 3917-4388 (Phone)
+852 2858-5614 (Fax)
HOME PAGE: http://www.fbe.hku.hk/Aboutus/Staff_Detail.cfm?StaffID=315
Robert M. Bowen
University of San Diego - School of Business ( email )
5998 Alcala Park
San Diego, CA 92110-2492
United States
619.260.2385 (Phone)
University of Washington - Foster School of Business ( email )
Box 353226
University of Washington
Seattle, WA 98195-3226
United States
HOME PAGE: http://faculty.washington.edu/rbowen/
James S. Wallace (Contact Author)
Claremont Colleges - Peter F. Drucker Graduate School of Management ( email )
The Drucker School of Management
1021 North Dartmouth Avenue
Claremont, CA 91711
United States
(909) 607-6063 (Phone)
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Citations:  27
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