Q. Behaviour of divisional senior executives?
EVA can affect the behaviour of divisional senior executives in the following ways.
1. They would concentrate their investment decisions on maximising shareholder value or financial wealth of their shareholders.
2. They would concentrate on the maximisation of cash or contribution which is more likely to maximise shareholder value e.g. EVA cannot be manipulated by a manager's choice over the accounting policies they might use.
3. They would focus on long-term decisions as opposed to short-term decisions e.g. with relative measures like return on investment (ROI) often new investments deliver low profit and have high accounting book values in the early years. This often discourages managers in the short-term from undertaking investment due to a low ROI.
4. Because a finance charge is applied against the replacement cost of assets, it forces managers to use and invest in assets more efficiently.
5. EVA will not discourage expenditure on long-term assets building for the future such as marketing or research and development. This is because these items will not be deducted entirely when arriving at economic profit, instead amortised over the period of the expenditures useful economic life. This would lead to perhaps greater EVA when compared to the measure of accounting profit. With accounting profit it is more likely the entire cost would be deducted and therefore could deter a manager if assessed on accounting measures such as residual income or return on investment.