Eva, Accounting Profits, and CEO Turnover: An Empirical Examination, 1985–1994

10 Pages Posted: 8 Feb 2019

See all articles by Kenneth Lehn

Kenneth Lehn

University of Pittsburgh - Finance Group

Anil K. Makhija

Ohio State University (OSU) - Department of Finance

Date Written: Summer 1997

Abstract

A growing number of companies use EVA or related measures of economic profits as metrics for corporate planning and executive compensation. Unlike traditional accounting measures of performance, EVA attempts to measure the value that firms create or destroy by subtracting a capital charge from the cash returns they generate on invested capital. For this reason, EVA is seen by its proponents as providing the most reliable year‐to‐year indicator of a market based performance measure known as market value added, or MVA. Although EVA and MVA have received considerable attention in recent years, there has been little empirical study of these performance measures—and what studies have been produced have provided mixed results. This study joins the debate over EVA vs. conventional accounting measures by asking a different question: Which performance measures do the best job of explaining not only stock returns, but the probability that a CEO will be dismissed for poor performance?. Using a sample of 452 firms during the period 1985–1994, the authors report that EVA has a somewhat stronger correlation with stock price performance than conventional accounting measures such as ROE and ROA. But, of greater import, EVA appears to be a considerably more reliable indicator of CEO turnover than conventional accounting measures.

Suggested Citation

Lehn, Kenneth and Makhija, Anil K., Eva, Accounting Profits, and CEO Turnover: An Empirical Examination, 1985–1994 (Summer 1997). Journal of Applied Corporate Finance, Vol. 10, Issue 2, pp. 90-97, 1997, Available at SSRN: https://ssrn.com/abstract=3329487 or http://dx.doi.org/10.1111/j.1745-6622.1997.tb00139.x

Kenneth Lehn (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-2034 (Phone)

Anil K. Makhija

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-1899 (Phone)

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