Can EVA create value?: a dynamic longitudinal investigation of three New Zealand companies

Abstract

When Economic Value Added (EVA™) was first promoted by the patent-holders, Stern Stewart and Company, it was hailed as an innovation in management accounting. The suggestion was that this measure could be used as the basis for the management control system within the firm, covering planning, control, investment decision making and remuneration determination. Many firms introduced the EVA system. New Zealand, in particular, was exposed to the EVA methodology through the publication in 1996 of a Value-Based Reporting Protocol that was recommended for state-owned enterprises. This study adopts a longitudinal perspective to examine the experience of three large companies in New Zealand, who implemented EVA in the late 1990s. These companies are ex-nationalised firms; two are state-owned enterprises and one is listed. The firms implemented EVA in the late 1990s and continued to use it as the management control system for a period of 10-15 years. The evidence is gathered from a questionnaire conducted in 1999, interviews conducted in 2001 and 2011, and supporting documentary evidence. It covers the entire ‘life cycle’ of EVA, from initial implementation, through its evolution to the eventual decline. Three different theoretical frameworks are developed from three academic disciplines and applied in an original context to analyse this EVA evidence. The first is the discovery theory framework, drawing from the economics literature base. This framework is used to consider whether EVA can be regarded as a discovery process within the organisation, to discover the source of value that is known to exist in these ex-nationalised firms. The second, from the management literature, is used to investigate whether EVA can be viewed as a management model in the firm. Finally, contingency theory as applied in management accounting is extended to a longitudinal perspective to analyse the variables that were important at each stage of the EVA life cycle. A central theme of each framework was the information provided and the incentives created by the measure. The thesis provides original contributions to the evidence on EVA, including why EVA needed to evolve and why it eventually failed. Further contributions are the suggestions for development and extension of each framework and the synthesising of the frameworks. Finally, implications for practitioners and policy makers are considered.