Economic Value Addition:The Conceptual Framework

Abstract

The metrics of financial performance are important in the corporate and investors' decision-making to the extent they influence the stock prices. Traditionally, accounting based measures of financial performance like EPS, ROI, ROE etc. have been found to influence the stock prices but, of late, due to vulnerability of these measures to accounting distortions, these measures are finding fewer acceptances among the investors. The Economic Value Added (EVA) framework developed by the Stern Stewart&Company is gradually replacing the traditional measures of financial performance due to its robustness and its immunity from "creative accounting".

EVA gained importance in the second half of 1990s and has emerged as one of the most prominent value based management techniques. Fortune magazine has called it "today's hottest financial idea and getting hotter" and management guru Peter Drucker referred to it as a measure of total factor productivity. Companies across a broad spectrum of industries and a wide range of countries have joined the EVA bandwagon and have started reporting their EVA numbers.

In this paper attempt has been made to discuss various aspects relating to EVA like its meaning, calculation, principles, implementation, objectives and its advantages and disadvantages.

The paper is original work of ours and we hope it will contribute to further research on the topic.