The Impact of Tax Reforms on EVA in the U.S.: An Empirical Examination

Abstract

This paper examines the impact of tax reforms on EVA on the non-financial S&P 500 firms by examining how ROIC, WACC, and growth in Invested Capital were affected by the 2017 tax reform through paired sample t-tests. We find that while the tax cut has increased ROIC-WACC, it hindered growth in Invested Capital. Furthermore, due to the distribution of ROIC-WACC across the sample firms being negative on aggregate, the increase in ROIC-WACC, which is still a negative figure, multiplied by a growing capital base, resulted in a decrease in aggregate EVA. This leads to the discussion of a critical invested capital growth rate, at which a given change in ROIC-WACC results in no change in EVA, and a discussion of how different firms have their EVA affected differently depending on their ROIC-WACC and Invested Capital growth rate.