EVA Performance Measurement is Faulty: So You May Be Persuaded to Switch to a Robust OEVA-TEVA Alternative
We argue that the Economic Value Added (EVA) is biased by design and will generally yield distorted assessment of both the operating and overall performance. Fundamentally, the scale of measurement bias depends on the interest tax shield actually obtained in a measurement period and on a book to value ratio, however, there are also other potentially significant sources of distortions induced by the metric design. A robust alternative we propose is a concurrent evaluation of operating and total performance with the two nested metrics, Operating EVA (OEVA) and Total EVA (TEVA). OEVA applies the risk of assets (rather than WACC) to calculates the full capital charge and is unaffected by financing activities. TEVA incorporates financing side effects by explicitly adding interest tax shields to OEVA, but can be calculated as simply as a sum of interest expenses and net income less the full capital charge. The OEVA-TEVA approach is computationally simpler than EVA, the corresponding valuation model is consistent with the cash flow discounting and can be utilized as a self-sufficient instrument for investment project appraisal and business valuation.
|Date of creation:||15 Feb 2013|
|Contact details of provider:|| |
When requesting a correction, please mention this item's handle: RePEc:col:000463:010721. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ignacio Velez)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.