Empirical analysis of adopters of economic value added

Abstract

Economic Value Added is a new measure of performance that is purported to better align managers’ incentives to that of the shareholders. Accordingly, firms that experience higher agency conflicts should be more inclined to use this performance evaluation system. Additionally, the organizational strategy of the firm should influence the likelihood of employing EVA. Prospector firms are defined as firms that apply a differentiation strategy while defender firms focus on being cost-leaders. Firms identified as prospectors should be less likely to use EVA. One hundred and fifteen firms were identified as being adopters of EVA. Logistic regression was performed to contrast these firms to a control group of 1271 non-adopters. The results indicate that firms using EVA exhibit a higher percentage of institutional ownership and a lower percentage of insider ownership than non-adopters. Prospector firms as defined by a higher ratio of research and development to sales tend to use EVA less than defender firms. Accounting adjustments are a focal point of the EVA formulation and the results presented in this study suggest that providing appropriate incentives may be more complex than the developers of EVA imply.