A study of the implementation feasibility of the Economic Value Added (EVA®)theory - Take Taiwan TFT-LCD industry as example
Date Issued
2004
Date
2004
Author(s)
Kao, Yung-Hsi
DOI
zh-TW
Abstract
ABSTRACT
Up to today, there are still issues related to the generally accepted accounting principles (GAAP) yet to be resolved. These include, among others, apt to be manipulated in the reporting of operating results, disregarding the reasonable valuation of intangible assets, and the overlook of equity capital cost that leads to ‘agency problems’, etc. Since the inception of 90’s, ‘Economic Value Added (EVA®)’ has become one of the most popular performance measures. In the late nineties, however, a lot of well known companies, like AT&T, JC Penny…..abandoned the adoption of EVA® based managerial system, and resumed to the conventional performance measures. This situation alerts us that there still exist some defects in the EVA® scheme. Domestically, the EVA® is still an unfamiliar term. Researchers do not reach a consensus on whether it is a better external or internal performance measure as compared with their conventional counterpart.
This study presented different views on the identification and treatment of certain frequently adjusted items in the EVA® scheme, including R&D expenditures, marketing expenses, provision for bad debts, depreciation and contraction in progress, etc.
TFT-LCD industry in Taiwan has expressed characteristics in capital and technical intensive, as well as fierce competition.
I used the five listed Taiwanese TFT-LCD industry companies’ quarterly public financial information, for the period December 2000 to March 2004, adjusted step by step into their respective economic value added (EVA®) as well as adjusted invested capital, by referencing to the theory and guidelines provided by the EVA®. This study then compared the capability in the reflection of market value added (MVA) of calculated EVA®, to the extent information and approach available and practical, with that of a few conventional accounting performance measures, namely, operating profit, ordinary income, and free cash flows, and found:
1. EVA® has had the capability in the reflection of MVA
for Taiwan TFT-LCD industry. The adoption of this
measure will have to weigh the benefit with the cost
associated therewith, however.
2. For the sample period, to the Taiwan TFT-LCD industry,
empirical evidences did not support the hypothesis that
EVA® outperforms other conventional accounting
performance measure. This may attribute to the facts
that sample companies in the industry are still in the
early development stage. They have common
characteristics in having heavy R&D as well as marketing
expenditures, and substantial plant and equipment
purchases, caused most sample periods’ EVA® negative
in value.
My recommendations on fields of further study include the methodology in the identification and amortization of intangibles, expanding sample coverage to upstream enterprises, choosing companies with implementation experiences as sample, obtaining further detail relevant information from inside, and the evaluation of effectiveness of using EVA® as an internal performance measure.
Subjects
經濟附加價值
市場附加價值
績效指標
Economic Value Added
EVA®
Performance Indicator
MVA
Market Value Added
Type
thesis
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