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The Search for the Best Financial Performance Measure

Subject

Finance

Publishing details

IFA Working Paper

Publication Year

1996

Abstract

We provide an analytical framework for evaluating operating performance measures in the context of shareholder value creation. Economic Value Added (EVA) performs quite well in terms of its correlation to shareholder value creation. However, we propose a refinement of EVA, called Refined Economic Value Added (REVA). REVA is a theoretically superior measure for assessing whether a firm's operating performance is adequate from the standpoint of compensating the firm's financiers for the risk to which they expose the capital they provide. We also conduct a comprehensive statistical analysis of both REVA and EVA to estimate their correlation with and their ability to predict shareholder value creation. REVA statistically outperforms EVA in this regard. Moreover, the realized returns for the top 25 REVA firms are higher than the realized returns for the top 25 EVA firms for 1988-92.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 244

Series

IFA Working Paper

Available on ECCH

No


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