Share performance and profit efficiency of banks in an oligopolistic market: evidence from Singapore

Abstract Using data envelopment analysis techniques, we evaluate the relative cost and profit efficiencies of a panel of six Singapore-listed banks during the period 1992–96. Average profit efficiency (83%) was found to be significantly lower than average cost efficiency (95%). The mean profit efficiency is, however, higher than the averages of banks in the US (64%) and Spain (72%). In a follow-up regression study using the modified efficiency scores of Anderson and Peterson (Management Science, 39 (1993) 1261–1264), we find that percentage changes in the prices of the bank shares reflect percentage changes in profit rather than cost efficiencies (correlation coefficients of 0.82 versus 0.32). This opens up a new window for understanding share price fluctuations and is to be expected as shareholders desire dividends which are paid out of profits and not income.

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