Monday, October 28, 2013

Return on Equity: How Much Is Enough?

Linked to this post is my recent American Banker article on the dangers of using an incomplete performance measure-return on equity (ROE) Performance.  ROE is incomplete because it ignores risk. Thus, when used as a performance measure it encourages management to assume more risk in pursuit of their ROE objectives. This can produce problematic growth initiatives including high risk M&A.The article also provides a back of the envelope approach to calculate the cost of equity, and how it can be used to set performance objectives.


PS (Don't forget the upcoming Acquisition Finance Course in Amsterdam.)

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