EVA and the market value of a company (summary)

• The bigger expected EVA the company has, the bigger is the market value of the company and the stock price
• Especially profitable growth (growth in EVA) gears up stock prices. Therefore companies like Intel, Microsoft and Nokia trade many times above their book values.
• Stock prices reflect the future EVA expectations. Those expectations are very uncertain and continuously changing and thus also stock prices are volatile. Therefore it might be in short term difficult to see the underlying connection between EVA (financial performance) and stock prices. Long term perspective helps in this sence.
• The most empirical studies have supported this theoretical connection between EVA and market value:
  • Stewart 1990
  • Lehn nad Makhija (1996)
  • Uyemura, Kanto and Pettit (1996)
• O´Byrne (1996)
• Milunovich and Tsuei (1996)
• Grant (1996)