EVA and shareholder value creation: an empirical study

In recent years, a variant of residual income often called Economic Value Added (EVA)' or Economic Income (EI) has become a popular concern in academia and business communities. This study investigates the general hypothesis that EVA is more highly associated with shareholder wealth and firm values than are traditional performance measures. Two commonly used value-based performance metrics namely, Total Shareholder Return (TSR) and Tobin's Q are also considered to highlight the valuerelevance of EVA vis-a-vis these measures in predicting shareholder wealth. Using a sample of panel data of around 12,000 firm-year observations taken from the Stem Stewart 1000 EVA/MVA database and the DATASTREAM file over the period 1991-2002, this study finds compelling evidence that shareholder value is a function of EVA. This study also provides evidence consistent with the notion that EVA outperforms other traditional performance measures in explaining shareholder wealth. Valuerelevance tests reveal EVA to be more highly associated with shareholder wealth than TSR and Tobin's Q. The incremental tests also suggest that EVA possesses the largest explanatory power (or information usefulness) over TSR and Tobin's Q. These results conclusively support the claims made by EVA proponents and further support the potential usefulness of the EVA metric for internal and external performance.