Association of DEA super-efficiency estimates with financial ratios: Investigating the case for Chinese banks

The great majority of applications of the popular frontier technique data envelopment analysis (DEA) do not test for the association of efficiency estimates with key performance indicators used by industry observers. Nevertheless, identifying efficiency estimates’ associations with commonly accepted...

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Bibliographic Details
Published in:Omega (Oxford) 2011-06, Vol.39 (3), p.323-334
Main Author: Avkiran, Necmi K.
Format: Article
Language:English
Subjects:
Applied sciences
Banks
Benchmarking
Benchmarks
Correlation analysis
Data envelopment analysis
DEA
DEA Benchmarking Profitability Financial ratios
Decision theory. Utility theory
Efficiency
Exact sciences and technology
Financial analysis
Financial ratios
Firm modelling
Mathematics
Nonparametric inference
Operational research and scientific management
Operational research. Management science
Probability and statistics
Profitability
Ratios
Sciences and techniques of general use
Statistics
Studies
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Summary:The great majority of applications of the popular frontier technique data envelopment analysis (DEA) do not test for the association of efficiency estimates with key performance indicators used by industry observers. Nevertheless, identifying efficiency estimates’ associations with commonly accepted financial measures of performance could guide benchmarking activities, pricing decisions, and regulatory monitoring. Thus, the current paper investigates to what extent bank DEA super-efficiency estimates are associated with key financial ratios. A low correlation may present an opportunity to address inefficiencies that were not obvious in financial ratio analysis, thus enabling an update of inferences drawn from ratios. Regressing ratios on efficiency estimates may also help predict financial ratios. Where an input–output specification is comprised of key financial ratios, DEA can also be used to objectively identify benchmarks for ratio analysis based on actual observed data collected from peers. Nine super-efficiency DEA formulations across two profitability models are systematically tested. The slacks-based measure of DEA with a parsimonious profitability efficiency model emerges as the most significant combination explaining the variation in the two industry ratios, post-tax profit/average total assets and return on average equity.
ISSN:0305-0483
1873-5274
DOI:10.1016/j.omega.2010.08.001