EVA: A Performance Review and Analysis of its Market Impact

Implications for Organizations in the Ukrainian Financial Markets

Abstract

This paper examines the effect that the information generated by the EVA® translation of the usual GAAP income has had on various measures of the firm's financial performance with an eye to its relevance for the Ukrainian financial markets. After profiling the emerging Ukrainian trading markets, a summary discussion of the concept of EVA® is presented. We then elaborate, in detail, the voluminous empirical research on EVA® where it is clearly shown that EVA® is not associated with higher earnings nor does it explain stock returns better than the traditional performance measurements. Finally, we examine the market effect of EVA® viewed through the usual CAPM measures, the Sharpe and Treynor performance indices and the CRSP ß and s peer groups for a sample of the Stern-Stewart & Co highlighted firms. The results of this market impact analysis are consistent with the lack of effect that others have found with the possible exception of a suggestion for a selected sub-sample of a positive stabilizing effect in these firm's earnings reflected by a lower relative risk profile. In summary, the results are clear: One needs to be wary about the claims made for EVA® regarding its positive effects on the firm's financial performance and market value.