Economic Value Added (EVA) for Performance Evaluation of Public Organizations
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Economic Value Added (EVA) for Performance Evaluation of Public Organizations Meena Subedi 1 & Ali Farazmand 1 Accepted: 17 September 2020/ # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This study tests whether economic value added (EVA) as a performance evaluation metric incentivizes public administrators to increase the performance of public organizations. It utilizes data from Wind Info Database (WIND) and finds that the adoption of EVA as a performance evaluation metric incentivizes public administrators to increase the overall efficiency of the public organizations under study. The study suggests that public administrators make prudent investment and operating decisions after the adoption of EVA as their performance evaluation metric, thereby increasing the overall organizational performance. Using 2274 firm-year observations for the period from 2009 to 2010 in China, this paper uses first-difference change analysis methodology that takes care of firm-level unobservable heterogeneities and addresses endogeneity concerns, thereby producing robust results. The change analysis setting has been used in prior studies to find the effect of certain treatment (e.g., Lyons et al. 2001; Kerr et al. 2006; Pal and Pohit 2014). Lyons et al. (2001) argue that the change analysis focuses on studying differences before and after services (i.e., the presence and absence of treatment) that are received. In our research design, the treatment is adoption of EVA by the SASAC, which occurred in year 2010. Keywords Economic value added . Firm performance . Organizational performance,
earnings before taxes . Return on equity . Public or state-owned enterprises (SOE, PE)
* Meena Subedi [email protected] Ali Farazmand [email protected]
1
Florida Atlantic University, 777 Glades Road, Boca Raton, FL 33431, USA
Subedi M., Farazmand A.
Introduction Economic Value Added (EVA) has been applauded to be the most recent and exciting innovation in the managerial performance evaluation measure.1 Prior research considers EVA as more potent than traditional measures of accounting profit in explaining market evaluation of the company (Chen and Dodd 1997; Young et al. 2000). The SASAC (State-Owned Assets Supervision and Administration Commission)2 had been using earnings before taxes and extraordinary items (EBT) and return on equity (ROE) in its performance score formula across all state-owned enterprises (SOEs) in China until 2009. However, beginning in 2010, the SASAC replaced ROE with economic value added (EVA). EVA equals net operating profit after tax less the cost of capital. The basic idea for EVA is that investors require a rate of return that compensates them for the use of their capital or the equivalent of their opportunity cost, and the level of risk undertaken. SASAC finds that EBT and ROE as two financial measures for performance evaluation of SOEs are faulty. It has led to overspending on capital projects, with lower returns, because the loans were available very cheaply. Even then, the returns
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