Is Economic Value Added (EVA) or Net Profit a Better Predictor of Commercial Banks’ Performance: A Study on Dhaka Stock Exchange

Abstract

This article assesses the relationship between Economic Value Added i.e. EVA and Net Profit with Market Value Added i.e. MVA for banking industry of Bangladesh. Data was collected from annual reports of 23 Dhaka Stock Exchange (DSE) enlisted commercial banks over the period of 2010-2019. Years 2020 and 2021 were not considered to avoid any possible distortion due to COVID pandemic. To analyze the data, correlation analysis, Pooled OLS model and simple regression were used. Results show that 19 banks display a positive relationship between EVA and MVA, but results of the Pooled Regression analysis contradict the findings and suggest that EVA and MVA don't show any statistically significant relationship. Net profit showed positive relationship with MVA and the relationship is statistically significant at 5% level of significance. The results of simple regression analysis also show that compared to EVA, Net Profit better explains the variations in MVA. We conclude that for the commercial banks listed in Dhaka Stock Exchange (DSE), value-based performance measure like EVA doesn’t show strong association with MVA while a traditional performance measure like Net Profit demonstrates a positive relationship with MVA. So, Net Profit is more reliable than EVA while explaining the shareholders’ value creation.