Efficiency and Stock Performance in European Banking

Beccalli, Elena; Casu, Barbara; Girardone, Claudia

doi:10.2139/ssrn.391668

Cited by 39 publications

(53 citation statements)

References 37 publications

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“…This shows that if a bank is cost efficient, this will be directly reflected in the future expectations of the banks' share prices. These results are consistent with the findings of Becalli et al (2006). The explanatory variables to account for the impact of efficiency change on share price were both statistically significant but size was statistically significant at 0.05, risk was 0.1 for SFA efficiency estimates.…”

Section: Resultssupporting

confidence: 90%

Bank efficiency and stock returns

Sarpong¹,

Winful²,

Ntiamoah³

2017

J. Econ. Int. Finance

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Increased competition and globalization have made it imperative for banks to achieve high efficiency in order to generate required returns. This paper investigates the relationship between bank efficiency estimates, derived from both Stochastic Frontier Approach (SFA) and Data Envelopment Analysis (DEA) and share prices of banks listed on the Ghana stock exchange. The results give an indication that changes in cost and profit efficiency are reflected in stock performance and that efficiency is directly observed by the public and reflected in share prices, though SFA efficiency scores are not reflected in share prices as being equally important as compared to DEA efficiency scores.

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Section: Resultssupporting

confidence: 90%

Bank efficiency and stock returns

Sarpong¹,

Winful²,

Ntiamoah³

2017

J. Econ. Int. Finance

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“…But only a few apply two or more techniques to an identical data set, especially European data (Weill, 2004). Studies that compare parametric and non-parametric techniques are Ferrier and Lovell (1990), Sheldon (1994), Resti (1997), Bauer et al (1998), Casu and Girardone (2002), Weill (2004) and Beccalli et al (2006) 3 . We briefly examine some of the evidence provided by these comparisons here.…”

Section: Related Literaturementioning

confidence: 99%

“…All approaches provide efficiency scores that are correlated with standard measures of performance. Beccalli et al (2006) measure cost efficiency of stock-market listed European banks in 1999 and 2000. They investigate the link between efficiency measures and the market performance of financial institutions by means of SFA and DEA and find that percentage changes in stock prices reflect percentage changes in cost efficiency, particularly those derived from DEA.…”

Section: Related Literaturementioning

confidence: 99%

The Cost Efficiency of German Banks: A Comparison of SFA and DEA

Fiorentino¹,

Karmann

Koetter

2006

SSRN Journal

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We investigate the consistency of efficiency scores derived with two competing frontier methods in the financial economics literature: Stochastic Frontier and Data Envelopment Analysis. We sample 34,192 observations for all German universal banks and analyze whether efficiency measures yield consistent results according to five criteria between 1993 and 2004: levels, rankings, identification of extreme performers, stability over time and correlation to standard accounting-based measures of performance. We find that non-parametric methods are particularly sensitive to measurement error and outliers. Furthermore, our results show that accounting for systematic differences among commercial, cooperative and savings banks is important to avoid misinterpretation about the status of efficiency of the total banking sector. Finally, despite ongoing fundamental changes in Europe's largest banking system, efficiency rank stability is very high in the short run. However, we also find that annually estimated efficiency scores are markedly less stable over a period of twelve years, in particular for parametric methods. Thus, the implicit assumption of serial independence of bank production in most methods has an important influence on obtained efficiency rankings.Keywords: Cost Efficiency, Banks, Stochastic Frontier Approach, Data Envelopment Analysis JEL: D24, G21, L25 Non-technical summaryTo measure the cost efficiency of banks, one should compare observed cost-and output-factor combinations with optimal combinations determined by the available technology (efficient frontier). The method to implement this analysis could be either stochastic or deterministic. The former allows random noise due to measurement errors. The latter, on the contrary, attributes the distance between an inefficient observed bank and the efficient frontier entirely to inefficiency. A further distinction is made between parametric or non-parametric approaches. A parametric approach uses econometric techniques and imposes a priori the functional form for the frontier and the distribution of efficiency. A non-parametric approach, on the contrary, relies on linear programming to obtain a benchmark of optimal costand production-factor combinations.The most popular methods are Stochastic Frontier Analysis (SFA), which is stochastic and parametric, and Data Envelopment Analysis (DEA), which is deterministic and non-parametric. This study analyses on the basis of five criteria to what extent SFA and DEA yield consistent cost efficiency (CE) measures when applied to the same dataset. In particular, we check to what extent they provide different efficiency scores when stratifying the sample according to year, banking group or both dimensions simultaneously.Our results show very low consistency between SFA and DEA measures, especially when applied to the entire panel sample. First, mean CE according to SFA is substantially higher compared to DEA. This difference becomes smaller when stratifying the sample according to year, banking group or both dimensi...

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“…Similarly, Kirkwood and Nahm (2006) report that changes in firm efficiency are reflected in stock returns. Beccalli, Casu and Girardone, (2006) also find that changes in efficiency are reflected in changes in stock prices and that the stocks of cost efficient banks tend to outperform their inefficient counterparts. Earlier, Chu and Lim (1998) had also found that percentage changes in the prices of the bank shares reflect percentage changes in profit.…”

Section: Introductionmentioning

confidence: 78%

Operating efficiency and firm valuation: evidence from India

Bhatnagar¹,

Bhatnagar²,

Bhullar³

2014

IIMS Jrnl. Mgmt. Sci.

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We examine the impact of operating efficiency on firm valuation. The study spans ninety firms spread over six major industrial sectors in India from 2005 through 2012. Six key ratios are considered for their possible impact on the enterprise value. Through panel data analysis, we find that gross profits, return on capital employed asset turnover and to some degree, sales have a significant impact on the enterprise value at the inter-industry level. In the collective sample, all six ratios pertaining to operating efficiency and profitability have a significant effect on enterprise value. We also note that with the infrastructure sector as the reference point, the role of banking sector is significantly positive in value creation. Further, value creation is more attendant to present performance rather than what might have happened in the past. Keywords: Operating efficiency, Panel Data Analysis, EV/EBITDA, Enterprise Value, Firm Value 1.IntroductionFirms continuously try to scout and opt for opportunities of achieving competitive advantage in an increasingly complex and competitive environment through organic and inorganic growth. Since it is sometimes considered a faster way to grow, corporate restructuring (inorganic growth) has emerged as a popular strategy among big and medium size corporate houses. The importance of a firm's valuation in this context cannot be overstated, for it establishes the price of a target firm, which, if not determined correctly, would lead to a loss to the acquiring or the target firm.Our goal in this paper is to see how a firm's operating efficiency affects its value. Seetharaman and Raj (2011) report a strong positive correlation between EPS and the stock price of Public Bank Barhad, a listed bank in Malaysia. We, however, avoid conventional measures like Earnings-per-Share (EPS) and Price-to-earnings (P/E) because when the total income of a firm is derived primarily from non-operating sources, the reality about a firm's operational efficiency may be obscured, if not hidden altogether. Naik (2007) had also considered variables like operating profit and expenses in his study on the operating efficiency of banks.Jin and Jin (2008) report a positive correlation between operating performance and stock price change among the top 10% performers on the Shanghai Stock Exchange in the first two years of research period but in the latter period of two years, operating performance is inversely proportional to stock price change. Their principal finding is that operating performance generally declined as the stock prices went up. Similarly, Kirkwood and Nahm (2006) report that changes in firm efficiency are reflected in stock returns. Beccalli, Casu and Girardone, (2006) also find that changes in efficiency are reflected in changes in stock prices and that the stocks of cost efficient banks tend to outperform their inefficient counterparts. Earlier, Chu and Lim (1998) had also found that percentage changes in the prices of the bank shares reflect percentage changes in profit.In this p...

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Efficiency and Stock Performance in European Banking

Cited by 39 publications

References 37 publications

Bank efficiency and stock returns

Bank efficiency and stock returns

The Cost Efficiency of German Banks: A Comparison of SFA and DEA

Operating efficiency and firm valuation: evidence from India

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