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Bank Efficiency and Share Prices in China: Empirical Evidence from a Three-Stage Banking Model

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  • Abdul Majid, Muhamed Zulkhibri
  • Sufian, Fadzlan

Abstract

This paper examines for the first time the relationship between China banks’ efficiency and its share price performance. Our analysis consists of three parts. First, we calculate the annual share price returns of the banks for each year between 1997 and 2006. Then we employ Data Envelopment Analysis (DEA) Window Analysis method, first proposed by Charnes et al. (1985) to estimate the efficiency of the banks. Finally, we estimate the annual share price returns over the change in efficiency, while controlling for other bank specific traits. The empirical findings suggest that large China banks have exhibited higher technical and pure technical efficiency levels compared to their small and medium sized bank counterparts, while the medium sized banks have exhibited higher scale efficiency. The relationship between China banks’ efficiency and share price performance suggest that bank efficiency estimates derived from the DEA Window Analysis method contributes significant information towards share price returns beyond that provided by financial information.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12120.

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Date of creation: 01 Mar 2008
Date of revision: 01 Apr 2008
Handle: RePEc:pra:mprapa:12120

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Keywords: Bank Efficiency; Share Prices; DEA Window Analysis; China;

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  1. Fu, Xiaoqing (Maggie) & Heffernan, Shelagh, 2007. "Cost X-efficiency in China's banking sector," China Economic Review, Elsevier, vol. 18(1), pages 35-53.
  2. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "Bank ownership and efficiency in China: What will happen in the world's largest nation?," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 113-130, January.
  3. Miller, Stephen M. & Noulas, Athanasios G., 1996. "The technical efficiency of large bank production," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 495-509, April.
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  5. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.).
  6. TULKENS, Henry & VANDEN EECKAUT, Philippe, 1993. "Non-Parametric Efficiency, Progress and Regress Measures for Panel Data : Methodological Aspects," CORE Discussion Papers 1993016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Ariff, Mohamed & Can, Luc, 2008. "Cost and profit efficiency of Chinese banks: A non-parametric analysis," China Economic Review, Elsevier, vol. 19(2), pages 260-273, June.
  8. Joshua Kirkwood & Daehoon Nahm, 2005. "Australian Banking Efficiency and its Relation to Stock Returns," Research Papers 0508, Macquarie University, Department of Economics.
  9. Drake, Leigh & Hall, Maximilian J. B., 2003. "Efficiency in Japanese banking: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 891-917, May.
  10. Chu, Sing Fat & Lim, Guan Hua, 1998. "Share performance and profit efficiency of banks in an oligopolistic market: evidence from Singapore," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 155-168, September.
  11. Belarmino Adenso-Díaz & Fernando Gascón, . "Linking and Weighting Efficiency Estimates with Stock Performance in Banking Firms," Center for Financial Institutions Working Papers 97-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
  12. Robert A. Eisenbeis & Gary D. Ferrier & Simon H. Kwan, 1999. "The informativeness of stochastic frontier and programming frontier efficiency scores: Cost efficiency and other measures of bank holding company performance," Working Paper 99-23, Federal Reserve Bank of Atlanta.
  13. Fotios Pasiouras & Aggeliki Liadaki & Constantin Zopounidis, 2008. "Bank efficiency and share performance: evidence from Greece," Applied Financial Economics, Taylor and Francis Journals, vol. 18(14), pages 1121-1130.
  14. Robert Webb, 2003. "Levels of efficiency in UK retail banks: a DEA window analysis," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 10(3), pages 305-322.
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