Shareholder value efficiency in European banking

Abstract

This paper advances the studies of [Hughes, J.P., Lang W.W., Mester L.J., Moon C.G., Pagano M.S., 2003. Do bankers sacrifice value to build empires? Managerial incentives, industry consolidation, and financial performance. Journal of Banking and Finance 27, 417–447] by developing a new measure of bank performance which we refer to as “shareholder value efficiency” – a bank producing the maximum possible Economic Value Added (EVA), given particular inputs and outputs, is defined as “shareholder value efficient”. This new efficiency measure is estimated using the stochastic frontier method focussing on the French, German, Italian and UK banking systems over the period 1997–2002 and includes both listed and non-listed banks. We find that European banks are, on average, 36% shareholder value inefficient. Shareholder value efficiency is found to be the most important factor explaining value creation in European banking, whereas cost and profit efficiency only have a marginal influence.