Research Journal of Economics & Business Studies - RJEBS - The ...

1. Review of Literature
Table 1: Summary of Findings of Literature during 1971-2009
Author (s) Major Findings
Edward (1998) Argued in favour of EVA and asserted that managers should undertake desirable
investments and activities that will increase the value of the firm, whereas ROA
may not. He also concluded that accounting reported EVA can also be increased in
the short run by actions that have detrimental long-term effects. For example to
postpone or to eliminate outlays for R& D, maintenance, advertising, etc.
Worthington Observed that there has been a conflict on measuring corporate financial
and et al. (1999) performance and incentive compensation plans that encourage managers to increase
shareholder wealth. It is concluded that examination of EVA over a longer time
frame would allow greater empirical certainty on its status as a corporate
performance measure.
Ismail (2006) Paper examines the claim of EVA and its superiority as a financial model compared
with other measures. It concluded that other macro economic variables like money
supply, inflation, GDP etc., must be considered in order to capture the unexplained
variation in stock return models.
Biddle (1998) The paper questions whether the notion of wealth creation as making money or
adding value is correct or not. According to the authors wealth is more than
financial capital and wealth creation include development of physical structure,
Mishra and et
al. (1997)
Stewart ( 1991)
Deo and et al.
(2009)
Barfield (2004)
financial, human and social capital.
The paper discusses about the traditional tools like earning per share (EPS), price
earning (P/E) ratio, return on net worth (RONW), return on investment (ROI), etc.,
in investment analysis and new concepts that received the attention of both
financial managers and investors in the capital market vice viz. Economic value
added (EVA) and market value added (MVA).
The article explains EVA Momentum, its calculation and myriad uses. According
to the author it is the ratio of the change in a company's economic profit in one
period to its sales in the prior period. Further it is concluded that corporate
executives can use it to directly compare the performances of different operating
units, benchmark against public peers, diagnose the sources of good and bad
performance, set corporate and divisional goals, value forward strategic plans, and
for a number of other things.
The article maps the views of Fortune 1000 companies CFOs on strengths and
weaknesses of EVA. The respondents agreed strongly the EVA is a reliable internal
measure, EVA provides correct incentives for allocating resources, EVA is better
than traditional accounting measures. With regard to EVA's weaknesses most of the
respondents strongly agreed that it is not for all the firms, computational process of
EVA is complex, EVA is a short-term measure, and EVA is more effective when
used with other measures.
Argues that managers' focus on increasing short-term EVA may discourage them
from making long-term investments. Thus, EVA may be ill suited for growing
businesses.
Bowen and et EVA does not help in situations in which underlying operating profits are a poor
al. (1998) measure which is a key component in computation.
Birchard (1994) Suggests that it can be biased against low-return start-up investments and can
favour businesses with heavily depreciated assets.
Jensen (2009) Observes that highly leveraged firms may need EVA less because debt provides
incentives to operate efficiently.
Brewer (1999) Note that EVA does not control for size differences across plants or divisions.
Bowen and et Highlight various firm-specific contingencies that might make a difference in
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