An Empirical Application of the EVA® Framework to Business Cycles

27 Pages Posted: 11 Jul 2015 Last revised: 15 Jun 2018

See all articles by Nicolas Cachanosky

Nicolas Cachanosky

Metropolitan State University of Denver; American Institute for Economic Research

Peter Lewin

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: May 20, 2015

Abstract

Following financial concepts like duration and economic value added (EVA®) we estimate the impact of interest rate movements on firms that are more and less roundabout. We find that firms that are more roundabout, that is, work with expected cash-flows with higher duration, are more sensitive to interest rate movements. To the extent that monetary policy is able to move the discount rate used by investors, monetary policy changes the relative present value of any investment project and therefore affects resource allocation. We show evidence that this effect is present in the U.S. in the years prior to the subprime crisis.

Keywords: business cycles, EVA, economic value added, average period of production, roundaboutness

JEL Classification: E32, E43, G00

Suggested Citation

Cachanosky, Nicolas and Lewin, Peter, An Empirical Application of the EVA® Framework to Business Cycles (May 20, 2015). Review of Financial Economics 30 (September 2016):60-67. Available at SSRN: https://ssrn.com/abstract=2628912 or http://dx.doi.org/10.2139/ssrn.2628912

Nicolas Cachanosky (Contact Author)

Metropolitan State University of Denver ( email )

Student Success Building
890 Auraria Pkwy #310
Denver, CO 80217
United States

HOME PAGE: http://www.ncachanosky.edu

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Peter Lewin

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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