EVA – Economic Value Added: Sifting the Direct from the Circumstantial
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Joph Sammut
SMC University
Zurich
July 2010
包汤圆图片1.Introduction
If ever there should have been an umbilical cord between the three pillars of business, that is, management, accountancy and economics, without doubt a credible contender should have been EVA (Economic Value Added). Its apogee lies in its Machiavellian roots. The investigation of how people behave and the outright manipulation of this behaviour for a clearly t financial objective.
EVA travels a long way in this direction. It protrudes itlf to be a non-conventional and non-statutory science in both human behaviour and profit measurement and in so doing claims to be the optimal linkage between the two in the quest for the futuristic perfect business project. This asrtion comes al西班牙大学
ong with a full asmbly of both defenders and sceptics and with the underlying suspicion that it can be either a myopia or an utopia or as is the most possible ca scenario somewhere in between. Along which coordinate is something yet to be discovered.
must的过去式This brief Paper shall analy in some detail the attributes of Economic Value Added (EVA) both as a financial performance measurement tool as well as an agent provocateur to spearhead the next management revolution in the post globalisation era, that is, performance related pay. The Paper shall address key issues with which EVA interlocks the sciences of management, accountancy and economics and shall strive to penetrate into the issue by parating the circumstantial from the direct evidence. Eventually this Paper shall come to a clo through the submission of the author’s views on the critical points raid.
2. Attributes of EVA
In its simplest form, EVA is defined as the monetary residue from business operations after allowing for the cost of capital. Its formal technical equivalent is Net Operating Profit After Tax (NOPAT) less Equity Cost. A neat conversion of accounting profit into economic profit through the factoring-in of the cost of capital.
牛奶鸡蛋麦片At face value the concept looks both revolutionary and new. Its originality however is limited to the wrapping as the idea dates back at least a hundred years and to a specific name – Alfred Marshall. The new promoters, Stern Steward, have simply re-invented the concept, banking on a more receptive and sophisticated market and smartly linking it to a remuneration revolution, thus leveraging the odds concurrently as the new futuristic firm model takes shape.
EVA’s main thrust is not so much its linkage between performance measurement and performance related pay but can best be captured in the alignment of both owners and employees’ interests along a common frequency. In so doing, EVA attempts to depart from the confrontational standpoints that have traditionally characterid shareholders/employees relationships and venture into an innovative business culture by capitalizing on a very simple but highly emotional catchword – ‘performance’.
Achieving this through already established and conventional routes is plain and simply not on EVA’s cards. Historical and statutory accounting is considered by EVA’s promoters as not
only an ineffective tool to gauge and promote business performance but more nsationally as means to airbrush and whitewash financial results.
EVA thus not only conflicts with traditional accounting but challenges its moral high ground. Against t
我是一只小兔子>生怎么拼he backdrop of recent accounting malai and financial meltdown, it can and should make inroads into modern business studies and thus establish itlf as a new pillar in shareholder/management relationship.
This new pro-scientific aspirant, furthermore, claims to be the clost link possible to market values. In this ctor it exults itlf in having an eminent and prominent defender in the form of Baruch Lev. The Harvard Business School professor had already made his position clear as regards the fragility between accounting data and capital market’s value. Lev made EVA’s leap forward in quality by criticising GAAP’s treatment of equity and thus hinting towards the inclusion of equity cost as fundamental for performance measurement and better alignment to market values.
宫寒有哪些症状Kramer and Pushner have tested the hypothesis that EVA is highly correlated with Market Value Added. They found that in all their tested cas the level of MVA positively relates to both NOPAT and EVA. O’Byrne and Steward studied market value variations in multiple year formats. Their findings point towards a clear superiority of EVA explaining market reactions and go on to conclude that becau EVA is systematically linked to market value, it proves to be a better predictor of market value than other performance measures.
A non-corruptible causality is thus added to the paradigm. Market value is the end quantifier of operational performance which in itlf is best measured by EVA and best prompted and provoked by employee participation modules. The direct relationship between participation and performance, the manner they relate and affect each other and finally how both then relate and mould market value can all be wrapped up as the core esnce of EVA theory.
This integrated business model knocks on the doors of two highly emotional economic notions. “There is no profit unless you earn the cost of capital” and “what gets measured gets managed”. It allies itlf with the accusation that traditional and established financial measures exclude shareholders’ investments and thus completely ignore the cost of capital. Considering the accounting anomalies’ direct relationship with traditional incentive compensation, a possible dysfunctional behaviour among managers and executives does not remain long on paper. It is probably in this region that traditional accounting has recovered its worst “corps”.
EVA’s attributes are directly correlated to one specific word: ‘language’. The medium that is not only recognisable by its superior measuring qualities but probably more strongly by being the preferred common denominator of tho on both sides of the equation shaping shareholder value.
3. Circumstantial and Direct Evidence
Problematic in the appreciation of this question, and probably also a key to its diffusion, is the paration between the measurement aspect and the alleged performance impact effect of
