The long-term effect of economic value added adoption on the firm’s business decision

Abstract

Purpose

This study aims to examine the long-term effects of adopting economic value added (EVA) as a compensation tool on managers’ behaviour.

Design/methodology/approach

The authors extend the sample used in prior studies both in the time and the cross-section dimensions.

Findings

The study conclusions are distinct from those offered by existing studies. The authors show that EVA adopters, relative to non-EVA adopters, increase the working capital cycle, use their assets less intensively and decrease their payouts to shareholders via a decrease in dividends and share repurchases. In investing decisions, the authors find a decrease in new investments, but no change in asset dispositions after the adoption of EVA compensation plans.

Originality/value

The study results highlight that the EVA adoption provides more incentives to reduce the total cost for capital rather than increasing operations and maximising shareholder wealth. The results also have implication for corporate management, particularly in the area of management compensation scheme design.

Citation

Guermat, C., Misirlioglu, I.U. and Al-Omush, A.M. (2019), "The long-term effect of economic value added adoption on the firm’s business decision", Accounting Research Journal, Vol. 32 No. 3, pp. 496-513. https://doi.org/10.1108/ARJ-01-2018-0018