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EVA – Advanced method for performance evaluation in banks

Author

Listed:
  • POPA Gabriela

    (The Bucharest Academy of Economic Studies, Romania)

  • MIHAILESCU Laurentiu

    (The Bucharest Academy of Economic Studies, Romania)

  • CARAGEA Codin

    (OTP Bank, Bucharest, Romania)

Abstract

EVA (Economic Valued Added) is a modern financial measurement tool that determines if a business is earning more than its true cost of capital. Including a cost for the use of equity capital sets EVA apart from more popular measures of bank performance, such as return on assets (ROA), return on equity (ROE), net banking income and the efficiency ratio, which do not consider the cost of equity capital employed. As a result, these measures may suggest a bank is performing well, when in fact it may be diminishing its value to its shareholders. EVA is a tool that focuses on maximizing shareholder wealth. EVA is an appropriate tool for motivation system and in this way it motivates managers to think like owners; and provides a common language within the corporate culture. The EVA application in banks is relatively new (it started to be implemented in U.S. in 1994) and is not as well known as other measures of bank performance. As in the Romanian Banking system this measurement method is not familiar or used, the purpose of this study is to introduce EVA and its advantages compared to other performance indicators and based on this study to try to implement it in one of the Romanian banks.

Suggested Citation

  • POPA Gabriela & MIHAILESCU Laurentiu & CARAGEA Codin, 2009. "EVA – Advanced method for performance evaluation in banks," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 12(1 Special), pages 168-173, July.
    • Handle: RePEc:rom:econmn:v:12:y:2009:i:1special:p:168-173
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    References listed on IDEAS

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    1. Dennis G. Uyemura & Charles C. Kantor & Justin M. Pettit, 1996. "Eva® For Banks: Value Creation, Risk Management, And Profitability Measurement," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 94-109, June.
    2. Biddle, Gary C. & Bowen, Robert M. & Wallace, James S., 1997. "Does EVA(R) beat earnings? Evidence on associations with stock returns and firm values," Journal of Accounting and Economics, Elsevier, vol. 24(3), pages 301-336, December.
    3. Gary C. Biddle & Robert M. Bowen & James S. Wallace, 1999. "Evidence On Eva," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(2), pages 69-79, June.
    4. Ralph C. Kimball, 1998. "Economic profit and performance measurement in banking," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 35-53.
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    More about this item

    Keywords

    performance measures; EVA; shareholder value; banks; motivation system;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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