VALUE-BASED PERFORMANCE METRICS AND SHAREHOLDERS'

VALUE IN THE NIGERIAN BANKING INDUSTRY

Jonathan Jenson1
jensonjonathan@yahoo.com

Fatima Alfa Tahir1

fadimaalfa@yahoo.com

Ahmad Imam1
Idainibm@yahoo.com

Abstract
Maximisation of shareholders’ wealth has become a major objective of financial
management in recent times. As a result, financial statements users employ
various performance metrics such as Net profit after tax, Earnings per share,
Return on Investment and Return on Equity to evaluate firm performance and
value creation in order to determine viable investment opportunities. Yet, these
measures failed to acknowledge the risk of investment, and, with this,
shareholders’ value by not incorporating company's full cost of capital. This
conceptual paper reviews the effect of Economic Value Added (EVA) and Market
Value Added (MVA) as value-based performance metrics on the shareholders'
value (Shareholders' Equity). The review concluded that EVA and MVA are
important variables when evaluating Shareholders' value. The paper
recommended a full empirical study to examine the magnitude of the effect of the
predictor variables on the response variable.

Keywords: Economic value added, Market value added, Shareholders' equity

Introduction
As the world grows, every activity that yields economic growth and development
also grows. Economic activities that can be explained in monetary terms are
infused in the accounting performance metrics. Maximisation of shareholders’
wealth is one of the reasons for management to perform well. When businesses
perform well, this triggers investment opportunities for potential investors as
serves as a market indicator for firm performance in the economy. However, when
investors invest their resources, they rely much on performance measures to
evaluate whether their investments are being maximised. Accounting-based
performance metrics such as Net Operating Profit After Tax (NOPAT), Earnings
Per Share (EPS), Return on Investment (ROI), Return on Equity (ROE), Absolute

1
Department of Accounting, University of Maiduguri

Sahel Analyst: ISSN 2705- 1943 Page 54

Journal of Resources & Economic Development (Vol.2, No.2 2019), University of Maiduguri

Divisional Profit (ADP) among others, provide investors with information on how
investments are performing. Yet, these measures (NOPAT, EPS, ROI, ROE) have
been criticised for their inability to incorporate company's full cost of capital.
Critics have called for other more encompassing measures of shareholders’ value

In addition, studies have shown that conventional accounting performance

metrics are ineffective in capturing the riskiness of investment in volatile
economies (Muhammed & Fong-woon, 2015), perhaps to inadequate information
captured by financial statements. This is because financial statements do not
explicitly disclose the value created by management. Besides, many financial
reports are clouded with creative accounting strategies, which have led to the
collapse of firms in the past Enron in 2001, WorldCom's in 2002 and Lehman
Brother in 2008. Following these failures, a new paradigm towards measuring
shareholders value created by management in tandem with shareholders needs
and changes in the business environment has been advocated. These challenges
and inadequacies of performance measures have led to the development of Value-
based performance metrics. Value-based performance metrics refer to the worth
of a firm resulting from managers' actions as agent of shareholders within a given
activity period. These metrics assess the value created by the management efforts,
which create value to shareholders. These value-based performance measures
include: Economic Value Added (EVA), Market Value Added (MVA), Cash
Flow Return on Investment (CFROI), Cash Value Added (CVA), Discounted
Economic Profit (DEP), Shareholders Value Added (SVA), Adjusted Economic
Value Added (AEVA), and Refined Economic Value Added (REVA) among
others. However, the three most significant metrics are EVA, CVA and MVA.
The EVA objectively evaluates value created to the shareholders when capital
charge is excluded from net operating profit after tax. The CVA determines value
creation by assessing cash inflows and cash demand in a given time period, while
MVA measures value creation by comparing the difference between current
market value of a firm and its book value at a given time period. Together, these
measures encompass institutional drivers such as governance, strategic planning,
resource allocation, and management performance and top management
compensation.

This paper provides insights to effectiveness of managers in creating value for

stakeholders’ resources. This knowledge can serve as a basis for managerial
appraisal and remuneration (promotion, wage increase or stock rewards). The
paper contributes to the body of existing literature as it provides a comprehensive
review, which identifies gaps for further research.

Sahel Analyst: ISSN 2705- 1943 Page 55

Value-Based Performance Metrics and Shareholders' Value in the Nigerian Banking Industry

Literature Review
Economic Value Added and Shareholders' Value Creation
Economic Value Added (EVA) was introduced by Alfred (1890) as economic
profit which is arrived at by deducting the cost of capital invested from profit
realised. The concept was further expanded by Frank and Merton (1961) as a
corporate investment decision that manifests in positive NPV resulting from
enterprise value and stock price. EVA is a single value-based performance metric
developed to evaluate business strategies, capital projects, fictitious profits and to
maximise long-term shareholders value (Shagufta, Vincent, Bibhas & Shubham,
2012). It considers economic profits and capital in order to ascertain the value
created or destroyed by an organisation during a particular period (Sharma, 2012).
According to Moreteza et al. (2012), EVA is defined as the amount of economic
value added by management on owners’ wealth. EVA is a modified version of
residual income or economic profit used to evaluate a firm’s financial
performance (Avijit, 2013 & Almomani, 2016). In other words, it is the surplus
generated from operating activities over and above the cost of capital.

The application of EVA is important to organisations because it reveals the extent

or otherwise of shareholders’ value creation. Stern, Bennett, Chew and Stewart
(2001) opined that the development of EVA coincides with the increased
empowerment of managers as decision makers, and it is a tool to meet the
potential agency issues that are created when ownership and management are
separated. Managers are motivated to make decisions that will create better value
to the shareholders, which will competitively sustain the organisational objectives
(Sarbapriya, 2012). This concept is important to uniting the interests of the
owners/managers and the ordinary employees. The compensating methods based
on EVA facilitate the achievement of an overall objective, or a goal congruence
and slicing down the potential agency cost which may be exonerated (ibid). A
further merit of adopting value-based performance metric through the use of EVA
is that its applicability is practically universal (ibid). It simplest application only
requires the use of income statement and statement of financial position of a given
organisation. It is believed by scholars that a positive EVA implies that value has
been created for shareholders while a negative EVA means that an equivalent
value has been destroyed. Technically, if a firm cannot cover its opportunity cost,
it adds less value to the society since the marginal value added means more factor
of production in form of capital is being withdrawn. Ray (2014) supported the
argument when he concluded that if increase in EVA is achieved by increase in
the cost of capital and then firm value may decrease. EVA is of course a residual
income that attempts to boost firms' revenue, minimises operating expenses that
are requite to generate revenue, enhance production of goods and services with
less utilisation of capital. It further identifies opportunities that earns more than a
charge on capital and finally reduces the cost of capital (Pratiwi & Reuben, 2008).

Sahel Analyst: ISSN 2705- 1943 Page 56

Journal of Resources & Economic Development (Vol.2, No.2 2019), University of Maiduguri

Comparatively, EVA is a more suitable predictive measure of market value than

other traditional accounting measures (Irala, 2007; Gabriela, 2008; Nuttawat et
al., 2008; Almeida, et al., 2016; Mohamadreza, et al., 2012). In supporting this
comparative superiority of EVA over conventional accounting investment
measures, Saeidet al (2012),in a paper the relationship between Economic Value
Added (EVA) and Return on Assets (ROA) in Tehran Stock Exchange
(TSE),concluded that the results of regression analysis explicitly showed a
positive relationship between EVA in the studied companies, but this relationship
was stronger in vehicle industry.

Moreover, Kenneth and Janis (2014) investigated whether firms with current
negative EVAs perform well in the future. The empirical result showed that, firms
in the categories defined as the least negative EVA and the second least negative
EVA are able to turn around and generate positive abnormal returns. The finding
of Shrikant, et al (2014) revealed that there is positive and significant relationship
between EVA and the shareholders’ wealth maximisation. This implies that, the
more managers produce EVA, the better for shareholders’ wealth maximisation
outcome that will be accrued to the company. Contributing on this, Mohammad
and Fong-Woon (2015) findings on the effect of Enterprise Risk Management
(ERM) on firm’s performance, measured through EVA factors, showed that ERM
implementation has significant positive impact on firm’s performance. In
addition, some studies (e.g. Ahmed & Okene, 2017; Chintra, 2017) showed EVA
significantly influenced the stock returns and accurately explains the index of the
created shareholders' value. A few studies (e.g. Habibollah et al., 2013;
Mohammad, 2013; Madan, 2013) however, question the superiority of EVA
against accounting performance measures. In sum, empirical evidences generally
support the influence of EVA on the performance of entities.

Market Value Added and Shareholders' Value

Market Value Added (MVA) refers to the margin between a firm's market value
and the economic book value of its capital employed. MVA is identical to market-
to-book ratio (Nikhil, 2000). The difference is only that MVA is an absolute
measure while market-to-book ratio is a relative measure. If MVA is positive,
market-to-book ratio is more than one while a negative MVA implies market-to-
book ratio less than one. If a company’s rate of return exceeds its cost of capital,
the company will sell on the stock markets at premium compared to its original
capital (has positive MVA). Contrastingly, companies that have rate of return
smaller than their cost of capital, sell at discount compared to original capital
invested in the company. Therefore, whether a company has positive or negative
MVA, depends on the level of it rate of return compared to the cost of capital.
Positive EVA also implies positive MVA since MVA is a present value of future
EVA (Vijayakumar, 2011; Habibollah, Nik, Melati & Karim, 2012; & Mehdi,
Esmaeil & Ali, 2013). Nevertheless, MVA is not a performance metric like EVA;
rather it is a wealth creation metric, measuring the level of value a company has

Sahel Analyst: ISSN 2705- 1943 Page 57

Value-Based Performance Metrics and Shareholders' Value in the Nigerian Banking Industry

accumulated over time. In other words, MVA indicates the market’s evaluation
of a firm’s current and future investment opportunities’ value and it may be
considered as an evaluation of the firm’s competitive strategy and its resource
allocation (Zeynab, Mehdi & Mohammad, 2013). It further, implies a product of
actual value of past projects and future profitable opportunities of a firm, which
indicates how successful the firm employs its capital, and predicted future
profitable opportunities and planned to achieve them. It shows additional value
added to the book value of the invested capital (Shrikant, Yuserrie, & Noor,
2016). Higher market value added, shows a healthy and well thriving company
which signal the likelihood of good returns for investors, which attracts
prospective investors, and gives confidence to those who have already invested
their capital in the company. It also shows an operational coefficient on returns
and profitability indices of investments. High returns for investors can lead to
more capital from these investors, as they seek to continue reaping the rewards
from their financial investment, their original investments and shares will increase
in value (Kinney, 2017).

Empirical studies report that MVA has a significant effect on stockholders' equity
(Zari, 2004; Reza, 2005). For instance, Hejazi and Hosseini (2006) examined the
relationship between MVA and EVA with accounting performance measures and
found a strong correlation between MVA and EVA. Yahyazadehfar, Aboonoori
and Abadian (2010) also conclude that EVA and profitability ratios with MVA
have a significant relationship. Likewise, the findings of Sharma and Kumar
(2012) show a strong and significant connection between EVA and MVA in
Indian firms. Kamalaveni and Kalaiselvi (2010) study also concluded that MVA
is very important in assessing management’s performance regarding
shareholders’ wealth maximisation. Similarly, Rajesh, Raman and Narayan
(2012) comparatively studied the relationship between EVA and MVA in cement
companies in India and found that EVA and MVA play an important role in
assessing financial performance of the companies. In addition, refined economic
value added (REVA) and market value added (MVA) were examined in terms of
ROA, the results show a positive linear relationship between MVA and ROE
(Mohammad & Zeynab, 2013; Zeynab, Mehdi & Mohammad, 2013). Further,
Avijit (2013) reported a linear relationship between market value of shares and
value-based performance measures such as EVA, CVA and MVA. The results
reveal that all the value based performance measurements have a positive and
significant correlation with share price.

However, some studies have reported none of the EVA factors has influence on
MVA. For instance, Ramachandra and Yuvaraja (2007) examined the effect of
selected variables on MVA and found none of the factors impacted on MVA. In
addition, Hamidah (2015) revealed that EVA has no effect on MVA. This implies
that EVA may not explain MVA in the banking industry. Furthermore, EVA and
the conventional measures of corporate performance were compared including

Sahel Analyst: ISSN 2705- 1943 Page 58

Journal of Resources & Economic Development (Vol.2, No.2 2019), University of Maiduguri

Return on Net worth (RONW), Return on Capital Employed (ROCE) and

Earnings per Share (EPS) respectively. The results of ANOVA, trend analysis and
regression analysis showed that there is no strong evidence to support claims of
EVA superiority to traditional performance measures in relation to MVA (Madan,
2016; Sorayya & Tooraje, 2017). Recently, Izhar, Shabbir and Mohammad (2019)
studied the relationship between EVA and MVA following economic crises
(between 2008 & 2009). Results from their fixed and random effect regression
revealed that there was strong negative relationship between EVA and MVA in
the post economic crisis period. These discussions provide support to the
proposition that MVA affects Shareholders' Value.

Following the review of prior studies, the study conceptualises the research
framework as shown in figure1. Shareholders’ Equity (SE) postulates the
framework shows EVA and MVA to influence shareholders’ value as proxied.
This relationship is supported by empirical studies that have relied on value-based
performance measures in performance evaluation as in Ray (2010); Shagufta,
Vincent, Bibhas and Shubham (2012); Avijit (2013b); Shrikant (2016).

Research Methodology
The study is a conceptual review paper, which provides a review of literature on
the variables under investigation. The methodology adopted therefore is
theoretical review and literature synthesis of on variables of interest and a
development of a research framework. As such, analysis and findings are not
included.

Conclusion
Despite the existence of numerous performance based measures in performance
management literature, scholars have noted the continued relevance of Economic
Value Added (EVA) and Market Value Added (MVA) to shareholders' value
creation. This is because of the inadequacies of financial statements in revealing
the value created by management on shareholders’ wealth. To address this
limitation, measures such as EVA and MVA were developed in order to determine
the value due to shareholders because of management actions. The paper

Sahel Analyst: ISSN 2705- 1943 Page 59

Value-Based Performance Metrics and Shareholders' Value in the Nigerian Banking Industry

concludes that organisations should employ value based performance measures

in order to overcome shortcomings of conventional accounting measures and
ascertain the actual value created by conscious managerial efforts using
shareholder resources. This will not only provide more insight on value created
thereby encouraging viable investments, it will also provide basis for rewarding
managerial efforts thereby improving performance, value creation and capital
market efficiency.

Limitations of the Study

The paper mainly focuses on empirical review and literature synthesis of prior
studies to arrive at logical conclusions that reveal gaps in the literature, which can
be filled by future studies. It recommends empirical validation of the postulated
research framework in order to ascertain the effect of the predictor variables on
the response variable.

References
Ahmed, A. B. & Okene, C. (2017). The Impact of Economic Value Added (EVATM)
on Stock Returns in Nigeria.Scholars Journal of Economics, Business and
Management; 4(2),

Almeida, L.S. F., de Julio, V. N,. Mara &Yohans, O. E. (2016). Comparative analysis
between EVAand traditional financial (accounting) indicators in Brazilian civil
construction companies: a documentary study.

Almomani, M. A. (2016). The Ability of Traditional and Modern Performance

Indicators in Interpreting the Phenomenon of Earnings Management: Evidence
Manufacturing Firms in Amman Stock Exchange. Asian Journal of Finance &
Accounting, 8(1), 77-99.

Avijit, S. (2013).Value Based Performance Indicators Versus Accounting Earnings

Based Performance Indicators – A Case Study With Reference to Ongc.
available on internet

Becerra, M. (2009). Theory of the Firm for Strategic Management.Economic Value

Analysis. Cambridge: Cambridge University Press.

Chen, S. & J. L. Dodd. (1997). Economic Value Added: An Empirical Examination

of a New Corporate Performance Measure.Journal of Managerial Issues, 9(3),
318-333.

Chintra, G,. G. & Venkateshwarlu, M. (2017). Shareholder Value Creation: An

Empirical Analysis of Indian Banking Sector. Accounting and Finance
Research, 6(1) 148-157. www.sciedupress.com/afr

Sahel Analyst: ISSN 2705- 1943 Page 60

Journal of Resources & Economic Development (Vol.2, No.2 2019), University of Maiduguri

Clinton, B. D., & Chen, S. (1998). Do new performance measures measure up?
Management Accounting, 80(4), 38–44.

Dodd, J. L., & Chen, S. (1996). EVA: A new panacea. Business and Economic
Review, 42(4), 26–28.

Gabriela C. (2008). Economic Value Added versus Traditional Performance Metrics

in the Czech Food-Processing Sector. International Food and Agribusiness
Management Review,11 (6), 324-336.

Habibollah, N., & Nik, I N. H.(2013).Analysing the Relationship Between Economic

Value Added (EVA) and Accounting Variables with Share Market Value in
Tehran Stock Exchange (TSE) Middle-East Journal of Scientific Research, 16
(11), 1589-1598

Hejazi, R., & Hosseini, A.(2006).A Comparison of EVA and Accounting Measures
in Tehran Exchange. Journal of economic research, 24(4) 237-261.

Irala, L. R. (2007). Corporate Performance Measures in India: An Empirical

Analysis, SSRN working paper series WP- 2007/ 01/A.
http://ssrn.com/abstract=964375

Izhar, A., Shabbir, A, & Mohammad, Y. (2019). A Study of Economic Value Added
(EVA) & Market Value Added (MVA) of Hindustan Petroleum Corporation
Limited: Global Journal of Economics and Business,6, (1), 225- 237

Kamalaveni, D. & Kalaiselvi, S. (2010). Market Value Added: A study in the select
Indian Software Companies. International Journal of Research in Commerce
and Management, 1(4), 227-224.

Kinney, A. (2017). Benefits of Market Value Added and Shareholders' Value.

https://bizfluent.com/list-6602604-benefits-added-market-value-.html

Madan, L. B. (2013). Economic Value Added and Shareholders’ Wealth Creation:

Evidence from a Developing Country. International Journal of Finance and
Accounting, 2(4), 185- 198.

Madan, L.B (2016). Disclosure of EVA in the Financial Statements: Experience of

an Asian Economy: International Journal of Management Sciences and
Business Research, 5(9), 28 - 48

Mehdi, R.A., Esmaeil, M & Ali F.Y. (2013). Impact of Working Capital Management
on the performance of Firms Listed on the Tehran Stock Exchange.
International Journal of Academic Research in Accounting and Management
Sciences, 3(3),352-364.

Sahel Analyst: ISSN 2705- 1943 Page 61

Value-Based Performance Metrics and Shareholders' Value in the Nigerian Banking Industry

Milunovich, S. & Tsuei,A. (1996). EVA in the computer industry.Journal of Applied

Corporate Finance, 9(1), 104–115.

Mohamadreza, A.,Mohamadreza, S., & Akram, D. F.(2012). Economic Value Added

vs. Accounting Residual Income; Which One Is a Better Criterion for
Measurement of Created Shareholders Value? World Applied Sciences Journal,
17 (7), 874-881,ISSN 1818-4952.

Mohammad F. S. (2013). EPS and EVA Forecasting Ability for Industrial Jordanian
Companies

Moreteza , H., Meysam, K., Navid, S. L., Mahmoud, S. L. & Hamzeh, M.

(2012).Comparison of Information Content Value Creation Measures (EVA,
REVA, MVA, SVA, CSV and CVA) and Accounting Measures (ROA,
ROE, EPS, CFO) In predicting the Shareholder Return (SR) Evidence from
Iran Stock Exchange.ARPN Journal of Science and Technology, 2(5), 517-521.

Muhammad, K. S,.& Fong Woon, L.(2015). Enterprise Risk Management Firm

PerformanceValidated Through Economic Value Added Factors. International
Journal of Economics And Statistics, 5(3), 239-245

Nikhil, C. S. (2009). Performance Measures: An Application of Economic Value

Added. International Journal of Business and Management, 4(3).
http://www.ccsenet.org/journal/index.php/ijbm/article/download/300/268

Nuttawat V., Robin L. & Yi Yi1. (2008).Economic Value Added (EVA) And Sector
Returns. Asian Academy of Management Journal of Accounting and
Finance,AAMJAF, 4 (2), 21- 41

O'Hanlon, J., & Peasnell, K. (1998). Wall Street's contribution to management

accounting: The Stern Stewart EVAfinancial management system.
Management Accounting Research, 9(4), 421-444

Petravicius, T. & Tamosiuniene, R. (2008). Corporate Performance and the measures

of Value added. Journal of Corporate Accounting and Finance, 23(3),194-
2001.

Pratiwi, P. W. & Reuben, G.B. (2008). The Relationship Between Economic Value
Added (EVA) and Market Value Added (MVA) with Reported Earnings: An
Empirical Research of 40 Listed Companies in Indonesia Stock Exchange for
The Year 2004-2007, Journal of Applied Finance and Accounting, 1 (1), 60-
72
Rajesh, M., Raman, R., & Narayan, R. (2012). An Empirical Study on EVA and
MVA Approach. International Journal of Marketing, Financial Services &
Management Research, 1(3), 23-32.

Sahel Analyst: ISSN 2705- 1943 Page 62

Journal of Resources & Economic Development (Vol.2, No.2 2019), University of Maiduguri

Ray, K.K (2014) EVA as a Financial Metric: the relationship between EVA and Stock
Market Performance. European Journal of Business and Management, 6(11),
105-114, www.iiste.org

Sakthivel, N. (2011). Shareholders’ Value in Indian Pharmaceutical Industry: An

Empirical Analysis. Indian Journal of Commerce & Management Studies, 2(1),
87-99.
Sarbapriya, R. (2012). Efficacy of Economic Value Added Concept in Business
Performance Measurement. Advances in Information Technology and
Management, 2 (2), 260-267.

Sharma A.K. & Satish K. (2012).EVA Versus Conventional Performance Measures

– Empirical Evidence From India; ASBBS Annual Conference: Las Vegas;19
(1),805-815.

Shagufta, K., Vineet C., Bibhas, C. & Shubham, G.(2012). Measurement of Value
Creation Vis-À-Vis EVA: Analysis of Select BSE Companies. Pacific
Business Review International, 5(3),114-131.

Shrikant, K. P., Yuserrie, B., Z.,&Noor, A. B. A. (2016). Investigating Relationship

Between Economic Value Added, Market Value Added And Shareholder’s
Wealth Creation. http://www.ccsenet.org/journal/index.php/

Stern, Joel M.G., Donald H., Bennett Stewart and J.R. Chew. (2001). The EVA
Financial Management System. Journal of Applied Corporate Finance, 18, 32-
46.
Sorayya, T and Tooraje D (2017) Investigate of the Effect of Leverage and Economic
Added Value on Market Added Value of Listed Companies in Tehran Stock
Exchange. New York Science Journal, 10 (10) http://www.sciencepub.net/
newyork 75-78
Vijayakumar, A. (2011), Economic Value Added (EVA) and Shareholders Wealth
Creation: A Factor Analytic Approach; Research Journal of Finance and
Accounting ; 2(12) , 22-37. ww.iiste.org
Yahyazadehfar, M., Aboonoori,E.,&Abadian M.( 2009). A study of the relationship
between EVA and profitability ratios with market value of shares of automobile
industry and parts manufacturing firms in Iran. Stock exchange quarterly, 6(1),
91-115.
Zeynab, R., Mehdi, M., & Mohammad, R. P. (2013). A Study of the Relationship
between Economic Criteria and Performance Evaluation Accounting with
Market’s Value added in the Firms Listed in the Tehran Stock Exchange.
Research Journal of Recent Sciences, 2(7), 31-36.

Sahel Analyst: ISSN 2705- 1943 Page 63