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Evidence is mixed regarding the efficacy of Economic Value Added (EVA), the relatively new financial-management tool. This analysis offers a new definition of value, and suggests that the missing link in the EVA process is productivity, generally found to be the engine of all economic growth.
Introduction
In recent years, Economic Value Added has been touted by the popular press as the financial savior of the corporate world. Indeed, Fortune magazine - in a 1993 cover story -- described EVA as "today's hottest financial idea and getting hotter." Corporate giants such as Coca-Cola, AT&T, Briggs-Stratton, DuPont, Eli Lilly, Quaker Oats, and others have adopted this new financial tool and, in many instances, reported significantly improved financials. A good example of EVA involving Coca-Cola and General Motors is presented in [4].
Coca-Cola, one of the earliest users of EVA, saw its stock price increase from $3 (on a split-adjusted basis) in 1981, when Coke first adopted EVA, to over $60. Moreover, its Market Value Added (MVA), calculated as the market value of all stock outstanding less its book value, increased by a factor of ten.
Coke's EVA experience seemingly contrasts sharply with the experience of some other firms not employing EVA, notably General Motors. By 1995, before the U.S. bull market significantly inflated stock prices, the market value of GM's stock was $69 billion. However, up to that year, investors had cumulatively supplied GM with $87 billion of equity, so GM was actually destroying capital as it manufactured cars.
In terms of stock price, GM's shareholders received only $.79 of wealth for every $1.00 they had cumulatively invested in GM, as of 1995. In sharp contrast, Coca-Cola's investors received $8.63 in wealth for every dollar invested by 1995. If the bull market of the 1990's is factored in, GM's investors have finally broken even, while Coca-Cola's investors have realized even greater returns.
On the surface, EVA is seemingly a powerful new financial management tool which is being used successfully and increasingly by some of our "best" corporations. However, when the empirical surface is scratched, EVA doesn't seem to be quite the elixir purported by its proponents. Indeed, EVA may be nothing more than a clever (and lucrative) re-packaging of some very old business principles.
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