Economic Value Added(eva) Myths and Realities

The literature regarding EVA has given assorted view, as stated by Lehen and Makhija (1997), "EVA is seen by its proponents as providing the most reliable year-to-year indicator of a market-based performance measure known as Market Value Added ... Despite wide interest in EVA, little is known empirically about the efficacy of this measure versus other measures of performance... The evidence from these studies is mixed, however, and has not be resolved the debate over performance measures". While accounting based performance measures such as net profit (PAT), earnings per share (EPS), return on equity (ROE), return on assets (ROA) and return on investment (ROIC) are among the most commonly used performance measures, they are often criticized for not taking into consideration the total cost of capital and for being unduly influenced by accrual-based accounting conventions. Stewart (1991) also support that such traditional measures as earning per share (EPS), return on equity (ROE), and return on investment (ROI) are misleading measures of corporate performance. But the empirical evidences about superiority of EVA over traditional matrices are mixed.