Impacts of inflation on the effectiveness of EVA: Evidence from Iranian companies

This study investigates the possible impacts of inflation on the effectiveness of the Economic Value Added (EVA). It is argued that the EVA represents a reliable measure of firm performance (Warr, 2005). However, inflation can distort EVA and potentially result in inefficient investment and compensation outcomes. In this study, we investigate the relative ability of the adjusted EVA and nominal EVA to measure firm performance as reflected in stock returns, stock prices, and operating cash flows. Following Warr (2005) using an inflation-corrected EVA metric, we measure the sensitivity of EVA to the inflation for a sample of companies listed in Tehran Stock Exchange operating in an economic environment with a high two-digit rate of inflation. The results do not show that adjusted EVA is superior to nominal EVA for firm performance evaluation on the basis of stock price. Except for Cement, Metals and Metal products, and Pharmaceutical and Chemical industrial groups we found no evidence that adjusted EVA is superior to nominal EVA for firm performance evaluation on the basis of stock price. Also, except for Metals and Metal products industrial group level, the results do not show that adjusted EVA is superior to nominal EVA for evaluating of firm performance on the basis of operating cash flows. Collectively, our results do not provide strong evidence indicating superiority of the adjusted EVA to the nominal EVA for evaluating of firm performance.