Economic Value Added (EVA Super TM): An Empirical Examination of a New Corporate Performance Measure

Is there a single measure of corporate performance enabling investors to identify investment opportunities and motivate managers to make value-added business decisions? Obviously, this is a question of utmost importance to investors, managers, and business researchers. Economic Value Added (EVA)(1) has been acclaimed to be such a measure (Tully, 1993). As defined by Stern Stewart Management Services of New York City, EVA is the difference between a company's net operating income after taxes and its cost of capital of both equity and debt (Stern Stewart, 1993). Although the term EVA had appeared in the literature as early as 1989 (Finegan, 1989; Walter, 1992), it did not receive much attention until a September 20, 1993, article in Fortune magazine (Tully, 1993). Following the article's strong praise of EVA as the most recent and exciting innovation in measuring corporate success, a flurry of papers have been published telling successful EVA stories and promoting EVA adoption (Rutledge, 1993; Walbert, 1993 and 1994; Birchard, 1994; Brossy and Balkcom, 1994; Byrne, 1994; McConville, 1994; White, 1994; Stewart, 1995). One major reason for EVA's sudden popularity is that it appears to have an impressive army of corporate sponsors including such giants as ATT Walbert, 1994). Although the anecdotal evidence may differ in detail between companies, a common theme emerges. Advocates find that EVA motivates companies to find ways to increase the efficiency of capital utilization and consequently brings about a superior stock performance. There is no doubt that when Roberto Goizueta, CEO of Coca-Cola, praises a new management idea, it sends a powerful message to his peers in Corporate America. Companies, large and small, appear eager to get on this new EVA bandwagon. Recently, we made a search in Disclosure SEC and EdgarPlus CD-ROMs and found that the momentum is increasing. As indicated in their annual reports and/ or proxy statements, dozens of companies are starting to implement and integrate EVA into their performance measurement systems. Companies appear to have become enamored with EVA without asking provoking, critical questions such as: Is increasing EVA all that matters in the marketplace? Is EVA a real innovation that provides Corporate America with the golden key to creating wealth? Are the traditional measures of accounting earnings still useful? Are there pitfalls that management needs to be aware of before embracing EVA? Our study addresses these questions and provides a preliminary empirical evaluation of EVA. …