English, Article, Journal or magazine article edition: EVA, Economic profit and cash value added do NOT measure shareholder value creation Fernández, Pablo

User activity

Share to:
 
Bookmark: http://trove.nla.gov.au/version/170222
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • EVA, Economic profit and cash value added do NOT measure shareholder value creation
Author
  • Fernández, Pablo
Physical Description
  • preprint
Notes
  • We analyze 582 American companies using EVA, MVA, NOPAT and WACC data provided by Stern Stewart. For each of the 582 companies, we have calculated the 10-year correlation between the increase in the MVA (Market Value Added) each year and each year's EVA, NOPAT and WACC. For 296 (of the 582) companies, the correlation between the increase in the MVA each year and the NOPAT was greater than the correlation between the increase in the MVA each year and the EVA. There are 210 companies for which the correlation with the EVA has been negative! The average correlation between the increase in the MVA and EVA, NOPAT and WACC was 16%, 21% and -21.4%. The average correlation between the increase in the MVA and the increases of EVA, NOPAT and WACC was 18%, 22.5% and -4.1%. We also find that the correlation between the shareholder return in 1994-1998 and the increase in the CVA (according to the Boston Consulting Group) of the world's 100 most profitable companies was 1.7%. We have also analyzed the relationship between shareholder value creation and various other parameters, including Economic Profit and EVA, during the period 1991-1997. In this case, the sample consisted of the 28 largest Spanish companies. Economic Profit had the highest correlation with shareholder value creation in only 4 companies (EVA in only 2), while in 18 companies the highest correlation was found for the interest rate. A firm's value and the increase in the firm's value over a certain period are basically determined by the changes in expectations regarding the growth of the firm's cash flows and also by the changes in the firm's risk, which lead to changes in the discount rate. However, accounting only reflects the firm's history. Both the items of the income statement, which explain what has happened during a certain year, and those of the balance sheet, which reflect the state of a firm's assets and liabilities at a certain point in time, are historic data. Consequently, it is impossible for accounting-based measures, such as those we have seen (EVA, economic profit, cash value added), to measure value creation. We finish the paper with an anecdote about EVA: an e-mail written by an analyst at Stern Stewart &​ Co. in response to an article, written by me, questioning the ability of EVA to measure shareholder value creation.
  • Economic Profit; correlations
  • RePEc:ebg:iesewp:d-0453
Language
  • English
Contributed by
OAIster

Get this edition

Other links

  • Set up My libraries

    How do I set up "My libraries"?

    In order to set up a list of libraries that you have access to, you must first login or sign up. Then set up a personal list of libraries from your profile page by clicking on your user name at the top right of any screen.

  • All (1)
  • Unknown (1)
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.

User activity


e.g. test cricket, Perth (WA), "Parkes, Henry"

Separate different tags with a comma. To include a comma in your tag, surround the tag with double quotes.

Be the first to add a tag for this edition

Be the first to add this to a list

Comments and reviews

What are comments? Add a comment

No user comments or reviews for this version

Add a comment