Value Creation in Banks and Informational Contribution of Value Efficiency

Abstract

This paper investigates the contribution of cost, profit and value efficiency in explaining bank performance for a sample of U.S. listed bank holding companies from 2004 to 2006. In the first stage of the analysis, we estimated efficiency scores and made a descriptive analysis. We found a strong correlation between profit and value efficiency scores although these two concepts are not necessarily associated with cost minimization objective. In the second stage, we measured bank performance using; first, stock return as an indicator of market sensitivity and second, EVA as shareholder value creation indicator. We used OLS and Panel regression models to assess the informational contribution of these efficiency concepts. Our results show that market indicators are not very sensitive to bank efficiency. Thus, shareholder value creation can better be explained by value efficiency rather than profit or cost efficiency.

Keywords: Shareholder Value, Cost, Profit and Value Efficiency, Stochastic Frontier, EVA, Banking, Market Performance

JEL Classification: G21, G32