An empirical study of inflation distortions to EVA [An article from: Journal of Economics and Business]

This digital document is a journal article from Journal of Economics and Business, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
Proponents of economic value added (EVA) argue that changes in the metric accurately measure changes in the performance of a firm or business unit through time and therefore can represent a reliable measure of managerial effectiveness. However, inflation distorts EVA through the operating profit, the cost of capital, and the capital base and these distortions have the potential to result in inefficient investment and compensation outcomes. Using an inflation-corrected EVA metric, I measure the sensitivity of EVA to the level of, and changes in, inflation for a large sample of US stocks and find evidence of significant inflation induced distortions.