Economic Value Added: A Financial Flexibility Tool

Corporate Ownership and Control 1727-9232 Vol. 12(1)

6 Pages Posted: 28 Jun 2015

See all articles by Reeta Bharat Shah

Reeta Bharat Shah

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM)

Arunima Haldar

S.P. Jain Institute of Management and Research

S.V.D. Nageswara Rao

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM)

Date Written: 2014

Abstract

With increased emphasis on shareholder value addition, there has been an ongoing debate on choosing the right measure of corporate financial performance. There is need for a single measure of financial performance that not only measures corporate financial performance but also works as a financial flexibility tool. The financial performance measure employed by the firm measures the value generated by the firm. This necessitates the firms to choose the right performance tool which can reflect the accurate value added by the firm. We study the role and implications of Economic Value Added as a financial performance measure and further discuss its applicability as a tool for introducing financial flexibility. Flexibility is assessed by measuring the impact of organization’s competitiveness and performance. The findings reveal that EVA as a tool enables the corporate to differentiate between value-creating and value-destructing activities and helps managers in taking right decisions which enhances shareholder value. Thus, finally the research makes a case for managers to use EVA as a tool to provide additional information to investors. Interestingly, EVA can also be adapted as a corporate philosophy for motivating and educating employees.

Keywords: Economic Value Added, Financial Flexibility

JEL Classification: G3, G32

Suggested Citation

Shah, Reeta Bharat and Haldar, Arunima and Nageswara Rao, S. V. D., Economic Value Added: A Financial Flexibility Tool (2014). Corporate Ownership and Control 1727-9232 Vol. 12(1), Available at SSRN: https://ssrn.com/abstract=2623562

Reeta Bharat Shah

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM) ( email )

Powai
Mumbai, Maharashtra 400076
India

Arunima Haldar (Contact Author)

S.P. Jain Institute of Management and Research ( email )

Munshi Nagar, Dadabhai Road
Andheri West
Mumbai, Maharashtra 119579
India

S. V. D. Nageswara Rao

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM) ( email )

Powai
Mumbai 400076
India
91-22-25767789 (Phone)
91-22-25722872 (Fax)

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