The origin
of Economic Value Added (EVA) can be traced back to Robert Hamilton, a Scottish
mathematician, who published a
book ‘An Introduction to Merchandize’ in 1777 and recognized that one could calculate a
merchant’s gain only after deducting from his profits an interest charge on his
stock (Elliot & Kay, 1777;
Hamilton, 1777). This concept as a matter of fact was later put forward
by Alfred Marshall, the noted
Cambridge Economist, in the early nineteenth century, who explained that to create wealth they must
earn more than the cost of supplied funds and proposed profit as the
residual income accruing to a firm’s owner as a return to the investment of his
own capital and to the pains he suffers in exercising his ‘business power’ in
planning, supervision and control. Marshall eloquently captures the essence of economic
profit by stating that, “When a man
is engaged in business, his profits for the year are the excess of his receipts
from his business. The difference between value of stock of the plant,
machinery etc., at the end and beginning of the year is taken as part of his
outlay, accordingly as there has been an increase or decrease of value. What
remains of his profits after deducting interest on his capital at the current
rate, is generally called his earnings of the undertaking or management” (Marshall, 1890; Abate & Grant, 2004). This
concept was also looked into by Eugen Schmalenbach, a
lionized German Accounting Scholar of 1922 (Schmalenbach, 1922; Forrester,
1993).

 

The concept first entered the corporate
arena in the 1920’s. It was introduced by the legendary leader Alfred Pritchard
Sloan, Jr., of the General Motors
Corporation as a performance measurement concept; however, it was soon
forgotten and then later was used by General Electric in
1950’s under the label ‘Residual Income (RI)’, as a performance measure for
their decentralized divisions (Stewart
III, 1994; Das & Parmanik, 2009; Alexei, 2012). However, the current theory about EVA®,
which is now a registered trademark of Stern Stewart & Co. and its concept,
was propounded and commercialized worldwide by Gordon Bennett Stewart III and Joel Stern in 1982, who co-founded
a New York Consulting Firm called Stern Stewart & Company, in 1992, in the
United States of America. It made them the foremost evangelists for the measure.
The company provides corporate advisory services to clients, primarily through
the adoption of its EVA Management Approach (Grant, 1996).

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Developed by the
consulting firm Stern Stewart & Co., EVA appeared to be a promising tool to
measure the wealth generated by a company for its equity shareholders. It
basically is a measure of residual income essentially the surplus left after
making an appropriate charge for capital employed in the business and meeting
the necessary requirements for funds. It is a power tool which when used with
the other metrics provides an integrated approach for firms engaged in intense
preparations for the future; maximizing their stock market values. It is a
revolutionary strategy and a measure of true value creation. Their success
spawned a whole host of imitators from other consulting firms, all of which
were variants on the excess return measure (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/invfables/eva.html).

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