Economic Value Added (eva) And Its Application

Investors are currently demanding Shareholder value more strongly than ever. In thel98Os, shareholder activism reached unforeseen levels with the companies in the United States. Thereafter also investors in Europe have increased the pressure on companies to maximize shareholder value. Even in Finland the so-called Shareholder value approach has gained grounds. This is due to e.g. abolishing the restrictions on foreign stock ownership. Foreign investors emphasize and demand focus on Shareholder value -issues. The financial theory has since long suggested that every company抯 ultimate aim is to maximize the wealth of its shareholders. That should be natural since shareholders own the company and as rational investors expect good long-term yield on their investment. In the past, this ultimate aim has however been often partly ignored or at least misunderstood. This can be seen e.g. from measurement systems. Metrics like Return on investment and Earnings per share are used as the most important performance measures and even as a bonus base in a large number of companies, although they do not theoretically correlate with the Shareholder value creation very well. Against this background it is no wonder that so-called Value based measures have received a lot of attention in the recent years. These new performance metrics seek to measure the periodic performance in terms of change in value. Maximizing value means the same as maximizing long-term yield on shareholder抯 investment. Currently the most popular Value based measure is Economic Value Added. There has been a vivid debate for and against EVA in academic and management literature. Unfortunately most EVA advocates and adapters discussed the faults of EVA, while they have praised the concept as a management tool. On the other hand most criticism against EVA has kept to fairly insignificant topics from the viewpoint of corporate control. This study seeks to clarify the concept of EVA especially from the viewpoint of business unit controlling. The objective of the study is twofold. Firstly, the study describes the theory and characteristics of EVA. This gives the framework to discuss the main objective: How companies use EVA? In this context, the study also offers some recommendations of how EVA should be used as a management tool. The study tries to bring together the relevant theoretical issues and controlling practice, especially from three aspects: shareholder value assessment, value management and activity based cost management.