Eva and Its Critics

This paper responds to the article by Biddle, Bowen, and Wallace (BBW) by suggesting that their study of EVA and earnings has three potential shortcomings: 1 A closer look at BBW's regression analysis suggests that investors, while apparently ignoring the cost of equity, put great weight on the cost of debt—a puzzling result in need of an explanation. 2 The attempt by BBW to “level the playing field” effectively makes the NOPAT model into a NOPAT and capital model. Thus, it is really an EVA model in disguise and offers no insight into the explanatory power of NOPAT or earnings by itself. 3 BBW's model of expectations is too simple. The ability of EVA to explain shareholder returns depends upon the accuracy of the model of expected EVA performance, and BBW make no attempt to derive a model of expected EVA improvement from the EVA valuation equation.