Title: Contemporaneous relationship between EVA and shareholder value

Authors: Wajeeh Elali

Addresses: Desautels Faculty of Management, McGill University, 1001 Sherbrooke St., West Montreal, Quebec H3A 1G5, Canada

Abstract: This paper investigates the assertions that EVA is more highly associated with shareholder wealth and firm values than are traditional performance measures. Two commonly used value-based performance metrics – namely, Total Shareholder Return (TSR) and Tobin|s Q – were also considered to highlight the value-relevance of EVA vis-a-vis these measures in predicting shareholder wealth. Using a panel sample of about 1000 American firms over the period 1990–2002, the study found compelling evidence consistent with the notion that EVA outperforms other traditional performance measures in explaining shareholder wealth. Value-relevance tests reveal EVA to be more highly associated with shareholder wealth than TSR and Tobin|s Q. The incremental value-relevance tests have also suggested that EVA possesses the largest explanatory power over TSR and Tobin|s Q. These results conclusively support the claims made by EVA proponents and further support the potential usefulness of EVA metric for internal and external performance measurement.

Keywords: economic value added; EVA; shareholder value; market value added; MVA; corporate governance; value-relevance; performance measurement; corporate governance; business governance.

DOI: 10.1504/IJBGE.2006.011157

International Journal of Business Governance and Ethics, 2006 Vol.2 No.3/4, pp.237 - 253

Published online: 19 Oct 2006 *

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