The Contrast,Application And Empirical Research Of EVA And Free Cash Flow In Value-based Management Of China

EVA, the abbreviation of economic value added, calculated by subtracting the opportunity cost of the capital from net operating profit after tax generated. EVA is a variant of residual income marketed by Stern Stewart & Co., a New York consulting firm. In economically developed country, there are many papers on EVA about its contribution to value creativity for shareholders both in theory and in practice. Many leading American and British companies now use EVA and make good profit. Since EVA was introduced to china By the end of the 20th century, Numerous articles had appeared in the business press on the subject. But it has not since figured prominently in practice in china.FCF, an abbreviation of free cash flow, involves deducting a capital payout from operating cash flow. FCF is mostly used in business valuation, decision-making of investment and financial analysis now. in recent years, it is regard as an effective indicator in value-based management, and make a great attention.The paper is organized as follows:Section 1 is an introduction of value-based management, EVA and FCF. Including meanings, targets, content and measurement of value-based management, origin, signification, calculation and functions of EVA and FCF.Section 2 contrasts EVA to FCF in different aspect of value-based management,comprises differences of their application on target of value-based management and business valuation in China, similarity and differences on basement and relation of value creators, advantages of EVA on incentive system and executive compensation and a new value-based target appraisal system.Section 3 considers application of EVA and FCF in China. The paper give an example of state-owned enterprise, calculate EVA and FCF and their valuation of the enterprise. A brief analysis of financing status and value-based management of EVA and FCF is given in the end.Section 4 examines their use in china with some empirical tests. These empirical tests include descriptive Statistics and linear regression. Some explain is given after the tests.The last section draw a conclusion of all above.