The Development Of Corporate Performance Measures: Benchmarks Before EVA
Stanley J. Garstka
Yale School of Management; Yale University - International Center for Finance
William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
July 12, 1999
Yale ICF Working Paper No. 99-06
Modern accounting-based valuation models such as residual income and EVA may be thought of as careful estimates of the economic return to investors in excess of the firm's cost of capital. The framework for these models can be traced to theoretical and empirical work in the early part of the century, coincidental with the introduction of mathematical economics to America and with the availability of standardized accounting data for use by professional statisticians. By the middle of the century these "economic theory" and "practical empirical" tracks began to merge and corporate managers consciously adapted and applied performance evaluation technology in the decision making process.
The development of corporate performance measurement over the past century has its genesis in the work of statisticians, economists and managers who sought to understand the functions of the American corporation and through this understanding to improve its operation. In this essay, we trace the development of early attempts by academics to compare economic performance across firms using empirical data. We also list significant developments in economic theory that are relevant to the performance assessment of firms. We argue that, even though several of the key concepts driving today's measures of corporate performance had their origin in the 1920's, much of the debate about corporate performance evaluation which still rages today has to do with the ability (or lack of ability) to generate appropriate accounting numbers to input into the theoretically correct economic models.
Number of Pages in PDF File: 12
JEL Classification: G39, M41, M46
Date posted: September 17, 1999