Český finanční a účetní časopis 2006(4):136-139 | DOI: 10.18267/j.cfuc.202

EVA versus earnings and correlation with stock returns

Jaroslava Holečková

Ing. Jaroslava Holečková, Ph.D. - proděkanka pro zahraniční styky, odborná asistentka; Katedra financí a oceňování podniku, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, nám. W. Churchilla 4, 130 67 Praha 3; <jahol@vse.cz>.

Dissatisfaction with traditional accounting-based performance measures has spawned a number of alternatives that could be used for performance-based compensation mechanism, as well. In connection with theory of agency costs there is a problem of the relationship principal - agent that is defined in the contract as a tool of mitigation the inherent conflict between managers and shareholders. Firms may be able to improve incentives by relying directly on other measures of performance which more accurately reflect the manager's contribution to firm value. Currently the most popular Value based measure is Economic Value Added (EVA). There is a debate about whether the new performance measures have a higher correlation with stock values and their returns than do traditional accounting earnings. Opinions of how to design the compensation contract differ widely. Some argue that managers should be paid according to stock price performance. The others argue that stockbased compensation imposes excessive risk on the managers, because firm returns reflect the factors beyond manager's control (i.e. inflation, etc.). The "value-added" of EVA by firms and industry was empirically estimated. These estimates are positive and significant in predicting which firms have actually adopted EVA as an internal performance measure

Keywords: Economic Value Added; Earnings; Stock Price; Agency Costs; Contract.

JEL classification: G40

Published: December 1, 2006  Show citation