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.

J

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