Like EVA®, the CVA® Concept Cannot Stand the Test Either
19 Pages Posted: 27 Mar 2003 Last revised: 10 Jun 2016
Date Written: February 17, 2016
Ottosson & Weissenrieder published their Study No 1996:1, entitled 'CVA, Cash Value Added - A New Method for Measuring Financial Performance.' It was followed by Study No 1997:3 by Weissenrieder, on the question 'Economic Value Added or Cash Value Added?'
Shareholders have financial requirements on management's strategic decisions, i.e. strategic investments. Those are the decisions in corporations that create value. It should therefore be obvious that those investments are the ones that should be financially evaluated - from the shareholders' perspective. Despite the importance of non-financial performance measurements such as the Balanced Scorecard, an accurate method of investment evaluation is needed, in order to make better strategic choices.
With reference to 'Plato and the cave', Ottosson & Weissenrieder introduce Operating Cash Flow Demand (OCFD) - with certain known characteristics - as a shadow on the wall of the cave. CVA then measures observable 'real cash flows' against the shadow, thus gaining knowledge about actual performance relative to 'the shadow'. It should give a practical way to discuss 'true returns'.
No more than a short comment on EVA(R) is given in this paper. The subject matter is the CVA(R) concept. Can it stand the test? Apart from observing the reality outside the cave (that will always be more desirable), not even the shadow in itself can stand the test.
Keywords: Strategic Decisions/Investments, Investment Evaluation, True Returns, Financial Performance
JEL Classification: M40, M46, G12
Suggested Citation: Suggested Citation