EVA Revisited

Much debate exists about the effectiveness of Economic Value Added (EVA). We evaluate 11 common concerns about EVA and conclude that the major concerns are that EVA: (1) is distorted by the depreciation method, (2) might require complex adjustments; (3) is a short-term measure; (4) is an absolute measure; and (5) has a low correlation with the stock price. Proponents argue that some concerns would be eliminated by focusing on MVA. Yet, there is no clear evidence to indicate that MVA is strongly correlated to either EVA or the stock price. If MVA is equal to EVA as some researchers suggest, EVA may not be a new paradigm for measuring financial performance. For those companies that adopt EVA despite its limitations, we offer several recommendations for using EVA more effectively