EVA (Economic Value Added) as Management Performance Evaluation

• Main Authors: Hsieh Min-Chun, 謝明俊
• Other Authors: Wang Taychang
• Format: Others
• Language: zh-TW
• Published: 1999
• Online Access: http://ndltd.ncl.edu.tw/handle/79768272865136728091

碩士 === 國立臺灣大學 === 會計學研究所 === 88 === Thesis Abstract Title of thesis : EVA® (Economic Value Added) as Management Performance Evaluation Name : Hsieh Min-Chun ( also known as David Hsieh ) Advisor : Taychang Wang Graduate date : December, 1999 Due to rapid changes in economic and information technology and how to create more powerful of competitive advantages within companies becomes the key issue. The environmental trends such as global expansion, customization and diversification, resulting in the dynamic driving the appearance of new forms, appears to be a transformation from command and control to decentralization of world-wide strategic business operating units based organization. Agency problems always exist whenever shareholders decide to delegate authorities to the managers of all business operating units, which are caused by the information asymmetry and/or moral hazard problem between the principal and the agent. Implementing EVA® as a way to evaluate management performance ( residual income method) can motivate the managers to take actions that maximize the value of the firm to the shareholders. The main purpose of this research is to direct managers'' attention in the idea behind the EVA® approach. The EVA® approach emphasizes the requirement to earn sufficient return on all capital employed and creates a new focus on minimizing the capital tied to operations. The findings from the empirical study of three local public listing corporations and one case study on a subsidiary of international pharmaceutical corporation can be summarized as follows: 1)Linking ABC to EVA® as operating improvement analysis. Annual budget planning can be provided by customers, channels or countries for all strategic operating units so-called profit centers which should be based on the main cost driven activities to allocate operating expenses and the subject to capital employed to products; in order to enhance the innovation improvement. 2)Linking the operating results as managers’ incentive bonus plan. Link all strategic operating units with the annual operation actual results to compute all SBU EVA® value as the incentive bonus plan which can reduce the agency costs. 3)Divest non-value-added assets. In case a SBU''s EVA® value is negative, management should consider its divestiture. Some of the international investment pharmaceutical plants in Taiwan have been divested and transferred into Mainland China or South Asia countries since 1980. 4)EVA® as new products launching bechmark. While the new products are launched, a lot of promotional campaign expenses or commissions.. etc will incur gradually. If the new product can not gain a positive EVA® ; reevaluating the sales policy or terminating this product is needed within the specific period. 5)EVA® as an appropriately capital structure indictor. Stock dividend is often used to signal operating results to the shareholders in the Taiwan’s stock market. But the stock price will drop dramatically if the increase in earnings per share is slower than the increase in outstanding shares. EVA® helps the management, employees to understand the cost of equity capital which can be helpful for the manager to decide how the fund portfolio investment or loans perform. This can also help to adjust capital structure accordingly to reduce cost of capital and risk management. 6)EVA® as firm value evaluation. The empirical study of three local public listing corporations (i.e. Formosa Plastic Co., Taiwan Semiconductor manufacturing Co., Ltd. And U Lee Co.,) sample data collected from 1994 to Jun.,1999 found their annual EVA® have closely co-move with their own stock market value ( i.e. MVA it’s market value added) respectively. 7)EVA® as acquisition of firm value evaluation. EVA® formula concept can be used to evaluate the acquisition value of an target when the synergy generated is greater than the cost of capital investment, i.e. one has a so-called successful deal.