Maximizing shareholder's value is the most substantial purpose of any corporate. Only maximizing the difference between the firm's market capital and the invested capital maximizes shareholder's wealth. This difference is called Market Value Added(MVA).
One of the best measures of shareholder's value is Economic Value Added(EVA), which has the strongest correlation with MVA among all of the performance measures. Many firms have broadly accepted EVA that was developed by Stern Stewart & Co., over the past 15years.
It is defined as an operating profits after-tax, less a charge for the use of capital. EVA takes into account the cost of equity, which has been ignored.
For this reason, EVA financial system can serve the interests of both shareholders and firm itself.
This paper proposes that how to calculate the EVA by converting balance sheet into another expense and how EVA explains stock price well. The statistical analysis of EVA is conducted to estimate its correlation with abnormal stock returns.
The results in 1991 shows that EVA is superior measure for assessing the firm's performance.
For companies that aim to increase their competitiveness, this paper proposes that EVA is likely to be successful basis.
