THE ECONOMIC VALUE ADDED (EVA): AN ANALYSIS OF MARKET REACTION

The Economic Value Added (EVA^® 1 The abbreviation EVA is a trademark of Stern Stewart & Company.¹) is a widely adopted technique for the measurement of value creation. Using different event study methodologies we test the market reaction to the introduction of EVA. Additionally, we analyze the long-run evolution before and after EVA adoption of profitability, investment and cash flow variables. We first show that the introduction of EVA does not generate significant abnormal returns, either positive or negative. Next, we show that firms adopt EVA after a long period of bad performance, and performance indicators improve only in the long run. With respect to the firm investment activity variables, the adoption of EVA provides incentives for the managers to increase firm investment activity, and this appears to be linked to higher levels of debt. Finally, we observe that EVA adoption affects positively and significantly cash flow measures.