The Metrics War in Economic Value Measurement in the Banking Industry: A Comparative Analysis of EVA™ and Its Alternatives
DOI:
https://doi.org/10.5377/reice.v12i23.18278Keywords:
Economic Value Added, Balanced Scorecard (BSC), Risk Adjusted Return on Capital, Tobin’s Q, Cash Flow Return on Investment, Market Value AddedAbstract
This article presents a comprehensive analysis of the most widely used value-based performance measures in the context of their association with stock prices and returns, challenging traditional accounting-based metrics. It focuses on Economic Value Added (EVA™), Balanced Scorecard (BSC), Risk Adjusted Return on Capital (RAROC), Tobin’s Q, Cash Flow Return on Investment (CFROI), and Market Value Added (MVA), examining their effectiveness in reflecting true economic profit and shareholder wealth creation. EVA™ is highlighted as a prominent measure, often considered superior in approximating shareholder returns and guiding corporate success. However, it also faces criticism for potential data manipulation and not accounting for size disparities. The BSC, while offering a multi-dimensional evaluation, is complex and sometimes ambiguous in its cause-and-effect relationships. RAROC, tailored for the banking sector, has limitations in evaluating comparative business opportunities and emphasizing individual risk management. Tobin’s Q, though conceptually appealing, faces practical challenges due to significant measurement errors and data availability issues. CFROI, known for its detailed economic assessment, is complex in calculation and faces the “hurdle rate problem.” MVA, straightforward in its approach, can be misleading due to its sensitivity to market sentiments. The article concludes that no single metric can perfectly capture corporate performance and shareholder value, emphasizing the need for a context-specific choice of performance measure that balances the benefits and drawbacks of each.
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