Efficacy of Economic Value Added Concept in Business Performance Measurement



Abstract: The idea of Economic Value Added (EVA) is somewhat new detection but the concept is age old. In contemporary economics and finance literature, EVA holds a less debated part as well as plays crucial role in business performance measurement. In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co, is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors (being shareholders and debt holders). This article tries to assess the efficacy of Economic Value Added concept in business performance measurement. This paper  analyses the notion  of Economic Value Added (EVA) that is gaining attractiveness in India and also  examines whether EVA is a better business performance measure or not. EVA provides a basis for the measurement of efficiency and motivates managers to be more efficient with funds, which is usually beneficial. But, EVA is not contributing to the stock return because the investors’ reliance and belief is on the provision of dividends to the share holder rather than increasing worth of the business. However, this method must be cautiously applied to ensure that it is measuring economic effects appropriately and does not create time-horizon distortion.


Keywords: Residual Income (RI), Shareholders’ Value, Market Value Added, economic value added, wealth maximization.

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