Measurement Of Economic Value Added, Recognized And Applied Research

Economic Value Added has evolved from the concept of Residual Income developed by Alfred Marshal in 1890.EVA differs from Net Income in that it charges for the use of stockholders' equity. The profound ramifications of adopting EVA lie in encouraging capital discipline by making managers consider the opportunity cost of net asset, thus enhancing their performance.The traditional model for measuring EVA can not assure us that EVA be reliable. Its use is not in accord with cost-benefit principle and seriously limits the wide application of EVA. So it is very important to improve the measurement of EVA. The simplified measurement model advocated by this article, argues that accounting adjustment is unreasonable in that it's equivalent to not accepting the fact that accounting information is reliable and relevant, and that it is still unnecessary to have the theoretically accurate weighted average capital cost as the opportunity cost of stockholders' equity.In order to test the applicability of the simplified measurement model, the corresponding EVAs and the relating measures of three kinds of stocks, which have been returned a verdict by regulation agencies, asserts that EVAs calculated by the use of the simplified model support the regulation conclusion, and that they are more effective in terms of measuring performance.Recognizing EVA in the financial statements means that it will be a basic accounting measure, in that way, the usefulness of accounting information for the external relating interest groups will be enhanced greatly.It has been proved that the compensation system based on EVA will align management behavior with wealth creation. The specific road map to implement the system has been propounded.