EVA Performance Measurement is Faulty: So You May Be Persuaded to Switch to a Robust OEVA-TEVA Alternative

26 Pages Posted: 17 Feb 2013

See all articles by Rauf Ibragimov

Rauf Ibragimov

Russian Presidential Academy of National Economy and Public Administration

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy

Date Written: February 16, 2013

Abstract

We argue that the Economic Value Added (EVA) is biased by design and will generally yield distorted assessment of both the operating and overall performance. Fundamentally, the scale of measurement bias depends on the interest tax shield actually obtained in a measurement period and on a book to value ratio, however, there are also other potentially significant sources of distortions induced by the metric design. A robust alternative we propose is a concurrent evaluation of operating and total performance with the two nested metrics, Operating EVA (OEVA) and Total EVA (TEVA). OEVA applies the risk of assets (rather than WACC) to calculates the full capital charge and is unaffected by financing activities. TEVA incorporates financing side effects by explicitly adding interest tax shields to OEVA, but can be calculated as simply as a sum of interest expenses and net income less the full capital charge. The OEVA-TEVA approach is computationally simpler than EVA, the corresponding valuation model is consistent with the cash flow discounting and can be utilized as a self-sufficient instrument for investment project appraisal and business valuation.

Keywords: Financial performance measurement, economic value added, operating EVA, total EVA, residual income, valuation model, market value added

JEL Classification: G32, G39, M21, M41

Suggested Citation

Ibragimov, Rauf and Velez-Pareja, Ignacio and Tham, Joseph, EVA Performance Measurement is Faulty: So You May Be Persuaded to Switch to a Robust OEVA-TEVA Alternative (February 16, 2013). Available at SSRN: https://ssrn.com/abstract=2219247 or http://dx.doi.org/10.2139/ssrn.2219247

Rauf Ibragimov (Contact Author)

Russian Presidential Academy of National Economy and Public Administration ( email )

Vernadskogo Avenue,82
Moscow, Moscow region 119571
Russia
007 495 4347103 (Phone)
007 495 4349027 (Fax)

HOME PAGE: http://www.ranepa.ru/eng/

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

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