Efficiency of financial institutions - part I
Article Type: Guest editorial From: Managerial Finance, Volume 35, Issue 2.
This issue of Managerial Finance is dedicated to the efficiency of financial institutions. These institutions play an important role in the financial markets and the economy as whole and, unsurprisingly, their performance has attracted the interest of academics and practitioners. While financial performance has been traditionally assessed with financial ratios(e.g. ROA, ROE, etc.), the advance in quantitative techniques resulted in a shift towards parametric and non-parametric frontier efficiency estimations. A survey by Berger and Humphrey (1997) identified more than 130 articles on the banking and insurance industries, while since that time hundreds of studies have been published. Yet, a number of issues, both methodological and non-methodological, remain unresolved.
After a rigorous review process, a total of ten papers were selected for inclusion in this double special issue. The first five that are country-specific are included in the current issue and discussed below. The other five examine cross-country samples and will be included in the second part of the special issue.
The view of La Porta et al. (1997, 1998) that elements of the institutional environment, such as the structure, quality, and enforcement of laws, are important determinants of the development in the financial markets is generally well accepted. However, the literature exploring the impact of institutional factors on bank efficiency is still on its infancy. In the first paper, Hasan et al. (2009) work towards this direction using a sample of banks that operate in various Chinese provinces. Their results show that institutional development is an important determinant of bank efficiency and that banks tend to operate more efficiently in those regions with greater presence of private sector and more property rights awareness, while the role of financial deepening and rule of law is less straightforward.
While there several studies on bank efficiency, the insurance industry has received considerably less attention, and several issues remain unexplored. In the second paper, Cummins and Xie (2009) examine for the first time the relationship between frontier efficiency estimates and market values for the insurance industry. Their research design consists of three steps that combine data envelopment analysis, event study analysis and regressions. Their results indicate that acquiring firms with higher cost and revenue efficiency earn higher abnormal returns around the announcement, while divesting firms with higher efficiency earn lower abnormal returns.
Abuzayed et al. (2009) use a sample of listed banks operating in Jordan between 1993 and 2004 to investigate whether earnings and its components are missing links between market and book values, as well as whether bank efficiency is an important determinant of bank market valuation. Their results show that the components of net income are more important than aggregate net income in explaining bank value and that bank operational efficiency adds incremental information in explaining the gap between the market and the book value.
There are many studies that attempt to explain the decisions of banks to go abroad, their size and profits. Others provide comparisons of the efficiency of foreign and domestic banks. Yet, the investigation of the determinants of foreign banks' efficiency is an area that has received limited attention. Sturm and Williams (2009) employ a three-stage analysis to examine the factors that influence differences in the efficiency of foreign-owned banks operating in Australia. Their main results are summarised as follows. Following clients,increases host nation efficiency, and new trade theory tends to dominate comparative advantage theory. The limited global advantage hypothesis of Berger et al. (2000) holds for US bank revenue creation efficiency, but not for their transformation of inputs into outputs.
Although most studies focus on the efficiency of banking organisations as a whole, another part of the literature investigates the efficiency of bank branches. However, not many attempt to explore the determinants of branch efficiency, especially as it concerns environmental factors. The first part of this double issue closes with the paper by Gaganis et al. (2009) who estimate the efficiency and productivity of 458 branches of a Greek commercial bank, operating in 13 regions of Greece over the period 2002-2005. Then, they use panel regression models to reveal the impact of internal and external factors on the efficiency and productivity scores.
In closing, I would like to thank the Editor of Managerial Finance,Prof. Don T. Johnson, for giving me the opportunity to edit this special issue. Special thanks are also due to the numerous anonymous referees who devoted their time to review the submitted manuscripts.
Fotios Pasiouras
References
Berger, A., DeYoung, R., Genay, H. and Udell, G.F. (2000), “Globalisation of financial institutions: evidence from cross-border banking performance”, Brookings-Wharton Papers on Financial Services, Vol. 3, pp. 23-120.Berger, A.N. and Humphrey, D.B. (1997), “Efficiency of financial institutions: international survey and directions for future research”, European Journal of Operational Research, Vol. 98, pp. 175-212.La Porta, R., López-De-Silanes, F., Shleifer, A. and Vishny, R.W. (1997),“Legal determinants of external finance”, The Journal of Finance,Vol. 52, pp. 1131-50.La Porta, R., López-De-Silanes, F., Shleifer,A. and Vishny, R.W. (1998), “Law and finance”, The Journal of Political Economy, Vol. 106, pp. 1113-55.
