The Banking and Finance Review

Using ROIC To Measure Shareholder Value in Community Banks

Victoria Geyfman, John S. Walker

Abstract


The purpose of this paper is to demonstrate the use of the return on invested capital metric (ROIC) to assess whether community banks are creating value for their shareholders. Using data for a sample of community banks in Pennsylvania (Pa.), this study applies a ROIC methodology to evaluate community banks’ performance in terms of value creation. The study finds that community banks in Pa. report good profitability levels over the 2010-2015 period. Their performance and risk characteristics are in line with their peers in the nation and, in fact, display more favorable credit risk. The study finds that based on the ROIC, top performers generate significant shareholder value. This study highlights shortcomings of traditional bank performance measures, particularly their failure to fully account for the risk-return tradeoff that might have contributed to the excessive risk taking prior to the recent global financial crises. ROIC is used by large corporations and was recently tested on a small number of global financial institutions. To our knowledge, this is the first study to apply the ROIC to community banks. The study contributes to research concerned with developing more informative performance metrics. It should be of interest to academics, consultants, and practitioners when evaluating the performance of community banks. 


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