Residual Income and EVA®

Abstract This article outlines the history of residual income as a performance measure, and describes the economic value added (EVA®) variant of residual income proposed by the consulting firm Stern Stewart and Co. It also summarises literature that has proposed or used residual income or a related accounting‐earnings‐based measure for the purpose of business valuation. Finally, it describes the link between (i) an accounting‐free measure of abnormal economic performance, (ii) EVA and (iii) another Stern Stewart performance measure termed market value added (MVA), which is the excess of a business's market value over the capital invested in the business.