Does EVA really improve a firm’s performance?

Abstract

In the last decade one performance metric has been revered as the most successful in measuring value creation and aligning managers interests with those of the company's shareholders. This metric is known as economic value added (EVA), and was made popular by Joel Stern and G Bennett Stewart III in the 1980's. Many anecdotes relating to the achievements in performance by companies that have adopted this measure have been documented in the literature. Claims such as EVA being the "true mover of stock prices" and thus having an almost perfect correlation with share price are made. Furthermore, a proposition has been made that following the implementation of EVA significant improvements become evident in the performance of the company 2 . This impresses on a reader the notion that introducing EVA will inexorably have positive ramifications for a company. Despite the barrage of claims, a deficiency of empirical evidence substantiating these claims exists. There appears to be a crucial need for research in this area, in order to determine the validity of such claims: whether it is in fact a superior performance measure to more traditional measures such as EPS, ROE, RONA and more specifically, does it veritably correlate with an observable significant improvement in a company's performance. This study aims to investigate the truth behind the claims that the introduction of EVA improves a company's performance. Two comparisons are made of the performance of companies that have adopted Stem Stewart's EVA programme: the first is a comparison between EVA companies and matched non-EVA companies in the two year period following the completion of the EVA integration. The second comparison focuses on EVA companies, investigating whether the performance following the introduction of EVA has improved comparatively to the period preceding its introduction. A further investigation is made relating to whether one form of EVA has more impact on a company's performance than another.