Academic journal article International Journal of Business Studies

Singapore Banking Efficiency and Its Relation to Stock Returns: A Dea Window Analysis Approach

Academic journal article International Journal of Business Studies

Singapore Banking Efficiency and Its Relation to Stock Returns: A Dea Window Analysis Approach

Article excerpt

This paper utilises the non-parametric Data Envelopment Analysis (DEA) window analysis method to investigate the long-term trend in efficiency change of Singapore commercial banks during the period of 1993-2003. We found that listed Singapore commercial banks have exhibits an average overall efficiency of 95.4% thus suggesting input waste of 4.6%. Our results suggest that the small Singapore commercial banks have outperformed their large and very large counterparts. We further established statistical relationship between cost efficiency and share price performance by employing panel regression analysis. The evidence seems to indicate that the changes in stock prices tend to reflect cost efficiency albeit with small degree of reaction. This suggests that stock of cost efficient banks to some extend outperform cost inefficient banks

Key Words: Banks efficiency, DEA, Window Analysis, Singapore

JEL Classification: G21


The Singapore government's decision to further liberalise the banking sector, which was relatively sheltered from international competition before the financial crisis of 1997-98, has contributed to the country's growing role as a financial centre for the region and a destination of choice for global investors. The banking sector in Singapore has grown rapidly and operated innovatively in recent years, becoming one of the main engines of growth and sources of employment. Face with these mounting competition, examination of banks efficiency in Singapore has therefore become an increasingly important issue for public and policy makers (Bhattacharyya et al., 1997, and Yeh, 1996).

On the other hand, in a semi-strong, efficient market where most of the information is incorporated into prices, stock value performance is, as it is widely accepted (Brealey and Myers, 1991), the best measure of estimating whether firms are creating value for shareholders or not. Studies on the stock market have found that stock prices do incorporate relevant publicly known information (Ball and Kothari, 1994). It may be expected that efficient firms perform better than inefficient firms do and this fact will be reflected in market prices (directly through lower costs or higher output or indirectly, through higher customer satisfaction and higher prices which in return may improve stock performance).

This paper attempts to combine these two literatures to explain and understand the relationship between estimated banks' efficiencies and its share prices. Specifically, working within the Singapore domestic banking arena, we investigate the influence of X-efficiencies derived from the DEA window analysis technique on the share prices of Singapore commercial banks that are listed on the Stock Exchange of Singapore (SES).

This paper contributes to the literature in several ways. Firstly, the scarce evidence that investigate the efficiency and performance of listed commercial banks in the literature in the context of small open economy. Secondly, there have been only a handful of banks efficiency studies utilising the DEA windows approach to reflect banks relative efficiency and performance stability overtime. Finally, it is the first application to further test the relationship between the efficiency scores obtained from a DEA window analysis and to link it with the share performances in the marketplace.

This paper also makes several contributions regarding both data and methodology. In terms of methodology, we present a potentially useful tool in the framework in examining the behaviour of share prices in the marketplace. Given the fact that emerging stock markets are frequently subjected to turbulence i.e. Asian Financial Crisis, 1997-1998, Russian bond default and Long Term Capital Management (LTCM) crisis in 1998, investigations into the relationship between banks' efficiency scores and its share price reaction could be particularly difficult. This paper suggests a potential way to stabilise the excessive volatility in the emerging stock market in investigating the relationship of banks' efficiency and its share prices in the marketplace. …

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