Disclosure Of EVA Use In Corporate Financial Reports: A Descriptive Analysis

Abstract

This descriptive study examines a sample of 269 firms that mentioned EVA in their public disclosures. The key findings of our study are: (1) the use of EVA is found in a cross-section of the industries; (2) the most commonly used source of disclosure is the proxy statement; (3) a majority of the firms use only EVA rather than EVA in combination with other traditional measures; (4) a majority of the sample firms apply EVA at the corporate level alone; (5) three-fourths of the sample firms use EVA as an incentive compensation tool; (6) most firms apply EVA and other metrics only at the executive level for compensation and performance evaluation; and (7) two common modes of compensation using EVA determination are bonus plans and stock options. The results of our study indicate that firms are steadily adopting EVA as one component of their value management system. In a related decision context, investors estimate the cost of equity capital to arrive at the intrinsic value of the firm. Firms can help investors reduce this estimation error by reporting their own estimate of the cost of equity capital, in turn, reducing the valuation error. Our findings have implications for the Securities and Exchange Commission and the Financial Accounting Standards Board in that they should recognize the need to address this issue thereby enhancing the decision usefulness of public reporting.