An analysis of the information content of economic value added as a performance measure of banks in Kenya

Abstract

This paper analyses the information content of Economic Value Added (EVA) performance indicator in the light of creating shareholder value within the banking industry. With increasing pressure on firms to deliver shareholder value, there has been a renewed emphasis on devising measures of corporate financial performance and incentive compensation plans that encourage managers to increase shareholder wealth. There is a growing number of studies examining which performance measure is the most compatible with shareholder value maximization, but the evidence surrounding this issue is mixed. In addition, few papers deal with this issue in the banking industry context. This study examines both relative and incremental information content focusing on the Kenyan banking industry. The investigation technique follows Biddle et ai., (1997), with a few departures to better tailor the analysis to the peculiarities of a bank. Our results suggest that the superiority of EVA is not verified in terms of relative information content, but there is confirming evidence when considering the incremental contribution provided by its components. One feature of our findings is that our results are sensitive to accounting adjustments that deal with a bank's peculiar features and if these distinctive characteristics are ignored when calculating EVA, there is little evidence to support EVA's superiority as an indicator of shareholder value.