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Public Organization Review

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23-10-2020

Economic Value Added (EVA) for Performance Evaluation of Public Organizations

Authors: Meena Subedi, Ali Farazmand

Published in: Public Organization Review | Issue 4/2020

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Abstract

This study tests whether economic value added (EVA) as a performance evaluation metric incentivizes public administrators to increase the performance of public organizations. It utilizes data from Wind Info Database (WIND) and finds that the adoption of EVA as a performance evaluation metric incentivizes public administrators to increase the overall efficiency of the public organizations under study. The study suggests that public administrators make prudent investment and operating decisions after the adoption of EVA as their performance evaluation metric, thereby increasing the overall organizational performance. Using 2274 firm-year observations for the period from 2009 to 2010 in China, this paper uses first-difference change analysis methodology that takes care of firm-level unobservable heterogeneities and addresses endogeneity concerns, thereby producing robust results. The change analysis setting has been used in prior studies to find the effect of certain treatment (e.g., Lyons et al. 2001; Kerr et al. 2006; Pal and Pohit 2014). Lyons et al. (2001) argue that the change analysis focuses on studying differences before and after services (i.e., the presence and absence of treatment) that are received. In our research design, the treatment is adoption of EVA by the SASAC, which occurred in year 2010.

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Economic Value Added (EVA) is calculated by subtracting the opportunity cost of the capital from profits generated (De Villiers 1997).

SASAC stands for State-Owned Assets Supervision and Administration Commission, which was created in November 2002 to ensure that SOEs advance the interests of the Chinese government.

SOE managers believe that obtaining such a rating is a great honor. In addition, the SASAC reinforces this honor by publishing annually a list of A-rated SOE managers.

Since it has been mentioned that SOE managers who receive a lower rating could be asked to resign from their current position. Although job turnover due to low ratings rarely happens, just the idea that the one could be get fired would make the individual managers more risk-averse while selecting projects. More specifically, they will do very good job on finding projects that provide return greater than the cost of capital.

Tankersley et al. (2020) state that the $2 trillion aid package due to COVID-19 not only saves jobs and bail out companies, but it also reorders the relationship between government and private industry. Similarly, during the financial crisis of 2007–2008, the government provided unprecedented amounts of assistance worth $700 billion in taxpayers’ money to bail out for profit companies such as banks, automakers, and insurance companies (Collins 2015). The US government allocated $2 billion to fund banks, railroads and other privately held companies during the Great Depression of 1930s (Olson 2017).

Prior studies have also pointed the importance of qualitative characteristics such as social capital (Subedi and Farazmand 2019) and socially responsible behavior (Bhandari and Kohlbeck 2018) for the success of the organizations.

Researches on for-profit area also discuss about the influence of government and politics in profit companies (Hassan et al. 2019; Bhandari et al. 2020).

On a related concept, some studies have also recommended partnership between private and public organizations to bring the best of the both worlds (Subedi 2020).

All continuous variables are winsorized at the 1 and 99th percent level.

0.0046/0.033 = 0.1394

0.0101/0.033 = 0.3061

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Title: Economic Value Added (EVA) for Performance Evaluation of Public Organizations
Authors: Meena Subedi
Ali Farazmand
Publication date: 23-10-2020
Publisher: Springer US
Published in: Public Organization Review / Issue 4/2020
Print ISSN: 1566-7170
Electronic ISSN: 1573-7098
DOI: https://doi.org/10.1007/s11115-020-00493-2

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