Project

Only available on StudyMode
  • Download(s) : 6
  • Published : May 31, 2013
Open Document
Text Preview
ERASMUS UNIVERSITY ROTTERDAM - ESE

Bachelor Thesis: Economic Value Added and its Effect on Managerial Behaviour An Investigation into the Effectiveness of an Economic Value Added Compensation System

ARUN PARAGH 11/7/2012

Student: Student ID: Supervisor: Department: July 2012

Arun Paragh 321388 Bart Snel Accounting, Auditing & Control

Abstract
As the financial statements of companies grow in importance, its users are increasingly demanding more adequate measures of performance and value. After the introduction of the Residual Income measure, Stern Stewart appraised this measure and eventually made further adjustments, giving rise to Economic Value Added (EVA). This measure is claimed to better reflect a company’s performance. However, the exact effects of using the EVA measure on a firm’s incentive program are still unclear. In this research paper, the goal will be to examine and interpret the effects of using an EVA-based incentive system on managerial behavior and firm profitability. 1

Contents
Abstract ...................................................................................................................................... 1 Introduction................................................................................................................................ 3 Literature Review ....................................................................................................................... 5 EVA performance measure in contrast to traditional performance measures ..................... 5 Introduction ........................................................................................................................ 5 Results ................................................................................................................................. 5 Conclusion ........................................................................................................................... 7 EVA Adjustments .................................................................................................................... 8 Introduction ........................................................................................................................ 8 The most common EVA adjustments .................................................................................. 8 Conclusion ......................................................................................................................... 12 Effects of EVA-compensation systems on managerial behaviour ........................................ 13 Introduction ...................................................................................................................... 13 Empirical studies ............................................................................................................... 14 Conclusion ......................................................................................................................... 18 Results ...................................................................................................................................... 19 Conclusion ................................................................................................................................ 20 Bibliography.............................................................................................................................. 21

2

Introduction
Traditional measures of accounting profit have attracted criticism in recent years. This has led to improvements and ultimately the development of the concept Economic Value Added (EVA), which is considered a far better measure of a company’s performance. The term, a registered trademark of consulting firm Stern Stewart, is calculated as the difference between the Net Operating Profit after Tax and the opportunity cost of invested capital. This opportunity cost is determined by the weighted average cost of capital (WACC) and the...
tracking img