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
