Impact of EVA Adoption on Long-Term Shareholder Value: An Empirical Investigation

Abstract

Our study examines Economic Value Added metric’s link to long term shareholder value creation. We assume that EVA adoption directs a positive change in managerial behavior that in turn affects long-term value generation. Unlike most prior research that uses only one sample, we employ two samples. The first sample is based on 57 U.S. firms that Stern Stewart & Company has posted on its website. They report that these firms have achieved superior financial
performance as a consequence of the adoption of EVA for the 1994-98 periods. The second sample is based on 178 U.S. firms’ proxy statements for the 1994-1999 periods in which these firms have described EVA use as a part of their performance evaluation and compensation metric. Our study’s results, using both long-term abnormal holding period returns and analyst forecast based on five-year growth of earnings per share show that EVA adoption has no significant impact on a firm’s long-run performance when compared to a control sample matched on industry, size and past performance. Moreover, we find no evidence that EVA adoption induces greater shortsightedness as EVA adopters do not underperform, on average, the non-EVA firms.