Under the framework of VBM, economic value added (EVA) is one of the approaches to measure the value-creating performance of business units and managers.
1) Do you think that EVA can be 'used' by company managers to actually improve performance?
Accounting measures more often produces historical data or distorted data that may have no relation with the real status of the company. But, EVA goes for adjustments to accounting data to make it economically viable. EVA is able to improve the performance of business unit or managers. For example, R&D normally classified as expense under accounting standard unless it meet several extremely requirements, then expense can be capitalized. Under EVA approach, R&D expense added back to the NOPAT which encourage managers innovation mind since the cost of innovation will not considered as a distortion of performance measurement as long as R&D will bring in the economic benefit in the future. The real life example would be James Hardie, he introduced EVA to its operation in 1996 and made a great success by doing that. We have to notice that, EVA performance measurement is a financing measurement, it must link to employees’ compensation and inventive payment system
EVA is a single period measurement approach which discourages managers to undertake long term profitable project.
Compare to ROI, ROI maximizing rate of return but not necessarily maximize the return for shareholders.
2) Companies should be required to calculate and report EVA or not?
In my opinion, EVA should not be required to calculate and report. It should be a voluntary option. 1. 164 adjustments is a heavy burden for many of the companies. There are other important issues need to be reported. 2. EVA is theoretically link to stock price as stock price reflects expected EVA. However, there is no confirming evidence to show EVA is value relevance. 3. EVA can be used as a performance measurement approach but not...
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