Risk Management and Shareholders’ Value in Ghanaian Banks

Abstract

The aim of this study is to investigate the impact of risk factors on shareholder value (proxied by shareholder value ratio, which is computed as EVA divided by capital invested) in Ghanaian banks. To account for the persistence of shareholder value, we used the System Generalised Method of Moments technique for a panel of 25 Ghanaian banks that covers the period 2007-2013. Results indicate that the three risk factors that must be on the top of the priority list of banks in Ghana in their bid to maximize shareholders’ value are credit risk, capital risk and liquidity risk. Credit risk has a positive relationship with shareholder value. This result can be attributed to the fact that loan loss provisions are used to smooth profits. Similar to the findings in literature, capital risk and liquidity risk have a negative impact on shareholder value. Results also depict persistence of shareholder value that is, previous performance in terms of value created for shareholders positively influence subsequent value created. These results are robust to alternative performance measures and model specifications. We also find that efforts directed towards maximizing shareholder value ratio would consequently improve the traditional measures such as ROE, ROA and EPR since they are highly correlated hence shareholder value ratio is a better measure of performance. Though ROE and ROA seem to show positive growth in bank performance over the period, shareholder value ratio shows a steady decline in performance. The decline is more pronounced when the financial turmoil was subsiding which debunks the assertion that the financial crisis had minimal effect on the Ghanaian banking industry. Interesting we find that whether a bank listed or not does not influence shareholder value ratio.