Rethinking the Role of Return on Equity and Economic Value Added in Shaping Shareholders' Wealth

What is it about?

This article dives into how we measure a company's financial performance and its impact on shareholders' wealth. We compare two popular measures: Return on Equity (ROE) and Economic Value Added (EVA). We found that, in certain cases, EVA performed slightly better than ROE in explaining changes in shareholders' returns. However, when looking at data over five years, we discovered interesting connections between current shareholders' returns and future results, supporting the idea that managing expectations about future financial results might be more impactful than just maximizing immediate results. The article highlights the ongoing debate about traditional financial measures and the constant search for what truly drives shareholder value.

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Photo by PiggyBank on Unsplash

Photo by PiggyBank on Unsplash

Why is it important?

This research is important because it delves into the effectiveness of widely used financial performance measures, specifically Return on Equity (ROE) and Economic Value Added (EVA), in influencing shareholders' wealth. By comparing these measures and exploring their relationships with shareholders' returns, the study sheds light on the strengths and weaknesses of each approach.