Factors Effective on Cost and Profit Efficiencies of Banks based on Data Envelopment Analysis Technique

Document Type : Research Paper

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Abstract

This research is aimed to measure cost efficiency and profit efficiency of Iranian commercial banks and to investigate the relation of cost efficiency and profit efficiency to some variables of size, capital adequacy ratio, cost to income ratio and profitability. This research is accomplished in two steps: first, cost and profit efficiencies of 10 banks over the period from 2006 to 2010 are calculated using Data Envelopment Analysis technique and then the relation of cost efficiency and profit efficiency to pre-determined variables is investigated utilizing panel data regression. At the first stage, the sample banks are classified into two groups of efficient and inefficient with respect to cost and profit and it is revealed that the investigated banks have more profit efficiency than cost efficiency. Moreover, findings of this research provide inefficient banks with a technique for moving towards efficiency. In fact, the Data Envelopment Analysis technique discovers reference units (among efficient banks) in order to determine optimum cost and profit required for inefficient banks. The results from the second phase of this research indicate that some assumed variables of efficiency including capital adequacy ratio and profitability ratio do not affect significantly the cost efficiency. However, the variables of cost to income ratio and size have significant negative and positive effects on cost efficiency respectively at the 5% level of error, indicating that the banks more willing to control costs are more cost efficient and also the larger banks are more taking advantages of economies of scale. Moreover, other results of this research indicate that except for the profitability variable, none of the other investigated variables, i. e. capital adequacy ratio, cost to income ratio and size have a significant effect on the profit efficiency.

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References

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Empirical Research in Accounting
Volume 7, Issue 3 - Serial Number 25
November 2017
Pages 81-100

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History

  • Receive Date: 22 May 2015
  • Revise Date: 25 October 2017
  • Accept Date: 03 September 2017

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