Financial Strategy, Second Edition

17

EVA Implementation, Market Over-Reaction and the Theory of Low-Hanging Fruit

Barbara Lougee, Ashok Natarajan and James S. Wallace

One often hears the expression that a picture is worth a thousand words. This may be especially true when attempting to describe mathematical relationships. In such situations, charts, like pictures, are able to convey the hypothetical thousand words. Sometimes, however, a thousand words only takes one to the middle chapter of a longer story. In such cases, the reader (or viewer of the picture) could be led astray in thinking the picture is complete.

In an effort to sell their products in an efficient manner, marketers may justifiably resort to using time and space saving devices such as charts to convey their message. This appears to be the case with regard to recent advertisements that appeared in the Harvard Business Review.¹ Stern Stewart and Company used charts in a series of advertisements to demonstrate a claimed relationship between a firm's stock price and the announcement of the firm adopting EVA. The advertisements had titles such as “Every Company Is in Business to Create Value. EVA Makes It Happen” and “Forget EPS, ROE, and ROI. EVA Is What Drives Stock Prices.” A pair of charts representing two of the featured companies, reproduced in Figure 17.1, documents a phenomenal stock price surge following the announcement of the firm's EVA adoption.

A fitting title to this story may be the “Tale of Two Firms.” It seems the charts only went to ...