IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

EVA, Economic profit and cash value added do NOT measure shareholder value creation

Listed author(s):
  • Fernández, Pablo


    (IESE Business School)

We analyze 582 American companies using EVA, MVA, NOPAT and WACC data provided by Stern Stewart. For each of the 582 companies, we have calculated the 10-year correlation between the increase in the MVA (Market Value Added) each year and each year's EVA, NOPAT and WACC. For 296 (of the 582) companies, the correlation between the increase in the MVA each year and the NOPAT was greater than the correlation between the increase in the MVA each year and the EVA. There are 210 companies for which the correlation with the EVA has been negative! The average correlation between the increase in the MVA and EVA, NOPAT and WACC was 16%, 21% and -21.4%. The average correlation between the increase in the MVA and the increases of EVA, NOPAT and WACC was 18%, 22.5% and -4.1%. We also find that the correlation between the shareholder return in 1994-1998 and the increase in the CVA (according to the Boston Consulting Group) of the world's 100 most profitable companies was 1.7%. We have also analyzed the relationship between shareholder value creation and various other parameters, including Economic Profit and EVA, during the period 1991-1997. In this case, the sample consisted of the 28 largest Spanish companies. Economic Profit had the highest correlation with shareholder value creation in only 4 companies (EVA in only 2), while in 18 companies the highest correlation was found for the interest rate. A firm's value and the increase in the firm's value over a certain period are basically determined by the changes in expectations regarding the growth of the firm's cash flows and also by the changes in the firm's risk, which lead to changes in the discount rate. However, accounting only reflects the firm's history. Both the items of the income statement, which explain what has happened during a certain year, and those of the balance sheet, which reflect the state of a firm's assets and liabilities at a certain point in time, are historic data. Consequently, it is impossible for accounting-based measures, such as those we have seen (EVA, economic profit, cash value added), to measure value creation. We finish the paper with an anecdote about EVA: an e-mail written by an analyst at Stern Stewart & Co. in response to an article, written by me, questioning the ability of EVA to measure shareholder value creation.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by IESE Business School in its series IESE Research Papers with number D/453.

in new window

Length: 22 pages
Date of creation: 19 Jan 2002
Handle: RePEc:ebg:iesewp:d-0453
Contact details of provider: Postal:
IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN

Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. Robert T. Kleiman, 1999. "Some New Evidence On Eva Companies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(2), pages 80-91.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ebg:iesewp:d-0453. 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: (Noelia Romero)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.