Measuring Value Enhancement through Economic Value Added : Evidence from Literature

Shareholder value maximization has become the predominant goal of corporations in India and the world over. This goal has gained further importance and focus in the recent years because of the demands made by financial institutional investors, financial markets and competitors on companies to perform and work towards continuous sustainable growth in shareholders' value. To achieve such goals, it is important for companies to device performance measures that are aligned towards the corporate goal of shareholder value enhancement. Many consulting firms have come up with different measures of performance such as Economic Value Added (EVA), cash flow return on investment, and Total Shareholder Return (TSR) to cater to the above need. Of these measures, EVA has become popular in India. The proponents of EVA, Stern Stewart and Co., claim that EVA is superior to other metrics, as it is the financial performance measure that comes closer than any other measure, in capturing the true economic profit of an enterprise, helps managers to make better decisions and motivates them to perform better. A plethora of academic research studies verifying the claims of the proponents have been conducted. The objective of this paper is to present different performance measures available, classify empirical studies carried out on EVA, focus on studies that evaluate the superiority of EVA over other measures, its utility and application, present their findings, and examine the possible reasons for inconsistency in the findings, methodology adopted for study and suggest avenues for future research in this area. This is done through a review of literature of the past two decades