Abstract
© 2020 by the authors; licensee Growing Science, Canada. The adoption of EVA as a compensation and management plan, generally, impacts positively the performance of companies adopting this method. However, this paper examines whether the adoption of the EVA framework enhances the firm’s performance and gauge the long-term effects of such an adoption on the firm’s value. It also assesses whether the market reacts to the announcement of the adoption of EVA as a compensation system. Moreover, the paper fills this gap in research literature by showing whether or not EVA adoption leads to a significant increase in firm value as reflected by its market prices on the long run. Growing evidence in research indicates that the stock market does not incorporate all firm information into the stock price quickly and completely (REF). Therefore, the critique that contemporaneous association between price and EVA does not reflect reality is likely to be correct. However, this paper takes a different action. The basic contention is that although prices adjust slowly to information, long horizons are sufficiently long for markets to incorporate almost all relevant information into prices. The study sample consists of 89 US firms adopted EVA as a compensation system. It compares the performance of adopting firms to that of selected matching firms and to the market indexes, particularly, the SP licensee Growing Science, Canada.
Highlights
It is generally accepted that the normative role of the executive manager is to maximize firm value (Wallace, 1997; Malmi & Ikaheimo, 2003)
The average CAR, the standard tstatistics, the skewness adjusted t-statistic with its bootstrapped confidence intervals, the skewness and kurtosis of each set of cumulative abnormal returns is shown for selected months
We provide a graphic summary of CAR, the skewness adjusted t-statistic and the 1% and 99% quantiles obtained from the wild bootstrap
Summary
It is generally accepted that the normative role of the executive manager is to maximize firm value (Wallace, 1997; Malmi & Ikaheimo, 2003). Previous research has examined whether the adoption of EVA’s incentive compensation plan has any impact on managers’ decision making (Wallace, 1997; Kleiman, 1999; Hogan & Lewis, 2005) All of this empirical research has the common assumption that the adoption of the EVA compensation system will rationalize a firm’s investment decision and will lead to using the existing assets more efficiently to generate more residual income and, to maximize shareholders’ wealth, as well. Even if EVA did induce the management to optimise firm value, the optimal change in the accounting variables may not always be in the same direction This is probably why the various studies that studied the effect of EVA adoption have found different and often conflicting results (Wallace, 1997; Kleiman, 1999; Cahan et al, 2002; Hogan & Lewis, 2005; Balachandran, 2006). While existing evidence points to a change in management decision, there is no evidence that adopting EVA increases value
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