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Value-Based Management, a widely applied reference for strategic management, aims at maximizing sustainable shareholder value creation. However, respective accounting metrics to measure the firm’s wealth creation, such as residual income and Economic Value Added (EVA®), are distorted by accounting depreciation, implying inconsistent investment disincentives. Annette Holler introduces two new depreciation-adjusted value metrics and illustrates the depreciation-related bias in a case study. Finally, a regression analysis adds to previous evidence on associations between value creation and stock returns as well as firm values.
Content Level »Research
Keywords »Depreciation - EVA - Economic value added - Performance - Residual income - accounting metrics - management
Value-Based Management (VBM) and performance measures; review of the Economic Value Added (EVA®) concept; bias of residual income (and EVA®) caused by accounting depreciation; introduction of new value-based metrics using economic depreciation: CRI and CEVA; value-relevance study examining associations with stock prices