Further EVA focuses on short

Further, EVA focuses on short term gains and immediate results that deter managers to invest their time and effort in innovative products and processes. Since costs associated with R&D in projects are immediately recognized, at least in part, by accountants, their benefits accrue to an organization few years down the line. The net effect of such investment by managers is lower EVA in the current accounting year, which could result in demotion, bypassed promotion or even layoffs. Hence, managers tend to forgo investment in R&D oriented projects that may produce greater returns. Such motivation to risk aversion emerges because EVA evaluates performance of managers in terms of immediate results that may result in poor competitive position of an organization in future. Moreover, EVA helps to identify the divisions that exhibit poor performance but do not point out to the root causes of operational inefficiencies (Pustylnick, 2011). It is asserted that operation managers are more concerned with non-financial performance measures like yield and throughput in order to enhance yields and remove bottle necks (McKinnon & Bruns, 1993). The only financial information needed by operation mangers is cost information. Financial numbers, such as EVA, are least helpful to operation mangers because they do not point towards the root causes of operational inefficiencies (Brewer et al., 1999). Furthermore, EVA does not take into consideration size differences (Hansen & Mowen, 1997; Horngren, et al., 1997). It is amplified that EVA is calculated on the total amount of invested capital, due to capitalization differences among larger and smaller firms, EVA will also tend to differ. For a large sized firm with high capitalization, EVA will be more compared to smaller counterparts (Brewer et al., 1999; Pustylnick, 2011). Finally researches like, Biddle et al. (1997), Chen and Dodd (1997) and Mishra (2009) assert that EVA does not strongly correlate with stock returns as claimed by its proponents.
Methodology
Results and discussion
Conclusion The study attempted to examine whether EVA or earning based performance metrics are best for explaining MVA in Indian firms. The results do not support the claim of Stern & Stewart that EVA is superior then traditional earning based performance metrics in explaining MVA. However it ubiquitin conjugating enzyme has been found that traditional earning based performance measures better explain MVA and among them OI for both manufacturing and sector have shown strong linkages with MVA. Moreover, it is found that all the performance metrics have a significant positive relationship with MVA but the important conclusion to be made here is that OI׳s explanatory power is almost thrice the explanatory power of EVA in both manufacturing and service sectors. Furthermore, all the traditional earning based performance measures have shown a higher explanatory power than EVA, implying that Indian markets can continue to evaluate the performance on the basis of traditional earning based performance measures. There can be numerous reasons as to why EVA does not perform well in India, for instance, the accounting adjustments to NOPAT suggested by Stern Stewart & Co. may not be always effective in India and might contain measurement error relative to what information Indian markets use for valuing firms. This phenomenon has also been explained by Biddle et al. (1997) who argues that in an attempt to ascertain the EVA, the adjustments made to NOPAT may remove accruals that are used by market participants for determining the future prospectus of the company. Thus, while EVA determines the true economic profitability of the firm its association with market returns is lost. Further, Kramer and Peters (2001) suggests that as market is constantly fed with news on earnings, it may not be quite responsive to EVA in short run. Moreover, prior literature gives another plausible explanation to the weak relevance of EVA in explaining MVA may be due to financial analysts “earnings myopia”. It is argued that certain adopters of EVA base their external performance on earnings because financial analysts continue to focus on the earnings as the measure of performance. Thus, it is widely acknowledged that market constantly fails to recognize the benefits of EVA reporting. With regard to Indian companies, EVA weak relevance can be because of non-mandatory disclosure of EVA statements in annual reports and also because of non-availability of detailed financial data. Thus, earning metrics are the only performance measures that financial analysts have to judge the performance of Indian companies. However, it must be acknowledged that in spite of the non-availability of financial data and non-mandatory disclosures of EVA, it has shown a significant positive association with MVA.