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Article
Publication date: 18 November 2021

David Mutua Mathuva and Moses Nzuki Nyangu

In this paper, the authors investigate whether the systemic local banking crises (LBCs) and global financial crisis (GFC) impact the association between bank profit

Abstract

Purpose

In this paper, the authors investigate whether the systemic local banking crises (LBCs) and global financial crisis (GFC) impact the association between bank profit efficiency and earnings quality in developing economies.

Design/methodology/approach

Using panel data spanning 29 years over the period 1991–2019 for 169 banks drawn from five East African countries, the authors perform difference-in-difference multivariate analyses using the generalised method of moments (GMM) system estimator on a sample consisting of 2,261 bank-year observations.

Findings

The results, which are robust for endogeneity and other checks, show that banks with higher profit efficiency consistently report higher quality earnings. The authors further establish that whereas systemic LBCs contribute negatively to bank earnings quality, the GFC tends to have a positive impact. These results are upheld when the joint impacts of both systemic LBCs, GFC and profit efficiency on earnings quality are considered. The positive influence of profit efficiency and GFC on earnings quality is pronounced under income-decreasing earnings management. The impacts of profit efficiency, LBCs and GFC on earnings quality appear to be non-monotonic and vary across the sampled countries.

Research limitations/implications

The study's findings are based on banks in five developing countries within a regional economic bloc. Additional studies could focus on other economic blocs for enhanced generalisability of the findings. In addition, some of the variables examined are studied at bank-level, while other variables are at country-level. Finally, the study establishes an association between the variables of interest, and this does not necessarily imply causation.

Practical implications

The results provide useful insights to bank regulatory and supervisory agencies on the need to exercise increased risk-based scrutiny over bank loan loss provisioning and minimum loan loss reserve requirements. From an audit perspective, auditors need to be cautious and apply an enhanced risk-based audit especially when auditing banks during and after a financial, banking or systemic crisis. Credit rating agencies need to pay closer attention to the LLPs of distressed banks. Finally, bank investors and customers should be cautious when using bank financial statements, since bank managers of poorly performing banks might engage in aggressive earnings management.

Originality/value

The study is perhaps the first to examine the joint effects of systemic LBCs on the association between bank profit efficiency and the quality of earnings in a larger dataset of banks in a developing regional economic bloc. The authors also employ the GMM system estimator in the modelling, which helps address some weaknesses in prior studies.

Details

Journal of Applied Accounting Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 13 February 2017

Ihsen Abid and Mohamed Goaied

The purpose of this paper is to evaluate and compare the efficiency ratios and the technological gaps of banking industries in seven countries of the Middle East and North…

Abstract

Purpose

The purpose of this paper is to evaluate and compare the efficiency ratios and the technological gaps of banking industries in seven countries of the Middle East and North Africa (MENA) region.

Design/methodology/approach

The meta-frontier model was used to evaluate efficiency across countries that may have different production technologies.

Findings

The results of the meta-frontier analysis of banking systems over the period from 1991 to 2011 showed that Tunisian banks were the most efficient in terms of cost and profit. For the cost (profit) model, the analysis of the technological gap showed that Egyptian (Tunisian) banks used the most advanced technology in offering financial services to clients. The comparison of efficiencies confirmed that most efficient banks in terms of cost are not necessarily the most efficient in terms of profit and vice versa. The authors also concluded that cost efficiency analysis provides a partial view of banking efficiency and hence, profit efficiency analysis is as important.

Originality/value

The study is relevant for policymakers, regulators and monetary authorities and for researchers to know more about the real differences of efficiency of banks across countries in MENA region and to clarify the sources of this inefficiency to better adapt to the new environment, to make strategic decisions and to reference the performance of banking institutions.

Details

International Journal of Productivity and Performance Management, vol. 66 no. 2
Type: Research Article
ISSN: 1741-0401

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Article
Publication date: 13 February 2009

Anastasia Koutsomanoli‐Filippaki, Dimitris Margaritis and Christos Staikouras

The aim of this study is to investigate profit efficiency in the banking industries of 11 Central and Eastern European (CEE) countries for the period 1998‐2005.

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Abstract

Purpose

The aim of this study is to investigate profit efficiency in the banking industries of 11 Central and Eastern European (CEE) countries for the period 1998‐2005.

Design/methodology/approach

The authors employ a directional technology distance function approach to measure profit efficiency and decompose it into its technical and allocative components. They use these efficiency measures to investigate potential differences in banking performance across countries and across banks of different size and with different ownership status.

Findings

The results indicate that the highest proportion of profit inefficiency in the CEE region is attributed to allocative inefficiency, recognizing that considerable variation and different patterns in inefficiency levels across banking systems can be observed. Small and domestic private banks appear to be the most efficient. A negative relationship between efficiency and bank size, the capitalization ratio and market concentration, and a positive relationship with the European Bank for Reconstruction and Development index of banking reform are also found.

Research limitations/implications

Bank performance relative to best practice is measured across the CEE region. While it is found that on average technical inefficiency is relatively small and about one quarter of the banks lie on the technological frontier, the size of technical inefficiencies is likely to be exacerbated if the sample were to include Western European banks.

Practical implications

The effects of banking reforms are evident by recent positive trends in profit and allocative efficiencies estimated for CEE banking sectors. These trends suggest that policy makers should intensify efforts to further improve the financial services regulatory and supervisory framework while freeing any remaining explicit or implicit barriers to bank competition.

Originality/value

The study departs from the traditional literature of efficiency. It uses a directional distance function approach to model multi input – multi output banking technology and to investigate profit efficiency in CEE countries.

Details

Managerial Finance, vol. 35 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 September 2004

Linbo Fan and Sherrill Shaffer

This paper studies the profit efficiency of a sample of large U.S. commercial banks and explores how this performance varies with selected measures of bank risk reflecting…

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1593

Abstract

This paper studies the profit efficiency of a sample of large U.S. commercial banks and explores how this performance varies with selected measures of bank risk reflecting aspects of credit risk, liquidity risk, and insolvency risk. We use a standard profit function and the stochastic frontier approach, and compare two standard functional forms – Cobb‐Douglas and translog – to assess the tradeoff between precision and parsimony. We find that profit efficiency is sensitive to credit risk and insolvency risk but not to liquidity risk or to the mix of loan products.

Details

Managerial Finance, vol. 30 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 14 November 2016

Abdul Latif Alhassan and Nicholas Biekpe

The purpose of this paper is to examine the empirical effect of competition on cost and profit efficiency in the South African non-life insurance market in a three-stage analysis.

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1200

Abstract

Purpose

The purpose of this paper is to examine the empirical effect of competition on cost and profit efficiency in the South African non-life insurance market in a three-stage analysis.

Design/methodology/approach

Using annual firm level data on 80 non-life insurance companies from 2007 to 2012, the authors first employ the stochastic frontier analysis (SFA) to estimate cost and profit efficiency scores. In the second stage, the authors measure insurance market competition using the Panzar-Rosse (P-R) H-statistics. In the final stage, the authors estimate a fixed-effects panel regression model which controls for heteroskedasticity to examine the effect of competition on the estimated efficiency scores. Firm size, diversification, age, risk, reinsurance and leverage are employed as control variables.

Findings

From the SFA, the authors find average cost and profit efficiency of 80.08 and 45.71 per cent, respectively. This suggests that non-life insurers have high levels of efficiency in cost and low efficiency in profit. The annual estimates of the P-R H-statistics also suggest that firms in the market earn revenues under conditions of monopolistic competition. The authors find a positive effect of competition on cost and profit efficiency to validate the “quiet-life” hypothesis which posits that competition improves efficiency.

Practical implications

Regulatory policies should be directed towards enhancing competition to improve on the low profit earning potential of firms in the non-life market.

Originality/value

To the best of the authors’ knowledge, this study presents the first application of a non-structural measure of competition to examine the empirical relationship between competition and efficiency in insurance markets.

Details

Journal of Economic Studies, vol. 43 no. 6
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 19 June 2020

King Carl Tornam Duho, Joseph Mensah Onumah, Raymond Agbesi Owodo, Emmanuel Tetteh Asare and Regina Mensah Onumah

The study examines the impact of risk on the profit efficiency and profitability of banks in Ghana.

Abstract

Purpose

The study examines the impact of risk on the profit efficiency and profitability of banks in Ghana.

Design/methodology/approach

Data envelopment analysis was used to estimate profit efficiency scores and accounting ratios were used to measure profitability. The panel corrected standard error regression was used to assess the nexus using a dataset of 32 banks from 2000 to 2015.

Findings

The paper found that the Ghanaian banking industry exhibits a variable return to scale property, suggesting that average costs change with output size. Profit efficiency score for banks closer to the efficiency frontier is 61%. Credit risk is significant in enhancing profit efficiency and return on equity. Market risk is relevant in improving profit efficiency, return on asset and asset turnover. To drive profitability, bank managers have to be committed to effective liquidity risk, insolvency risk and capital risk management. Operational risk reduces shareholders' returns. The impact of size, age, stock exchange listing, cost efficiency and competition have are all been discussed extensively.

Practical implications

The findings contribute to the knowledge on the risk-performance nexus and provide information that is valuable to academics, bankers and regulators for policy formulation. The findings are relevant to the newly established Financial Stability Council.

Originality/value

This paper appears to be among the premier attempts to examine the effect of various risk types identified in the Basel III framework on bank performance in Africa.

Details

Journal of Economic and Administrative Sciences, vol. 36 no. 4
Type: Research Article
ISSN: 1026-4116

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Article
Publication date: 4 September 2018

Jiao Yan, Chunlai Chen and Biliang Hu

The purpose of this paper is to analyze the relationship between farm size and agricultural production efficiency from the aspects of output and profit in order to find an…

Abstract

Purpose

The purpose of this paper is to analyze the relationship between farm size and agricultural production efficiency from the aspects of output and profit in order to find an optimal farm size that achieves both output and profit efficiency in agricultural production in China.

Design/methodology/approach

This study uses the 2012 China Family Panel Studies survey data and employs the stochastic frontier analysis (SFA) models to investigate empirically the relationship between farm size and agricultural production efficiency.

Findings

The study finds that there is an inverted-U curve relationship between farm size and output efficiency and a U-shaped curve relationship between farm size and profit efficiency in agricultural production in China. Based on the empirical results, the study estimates that the appropriate farm size is around 10–40 mu and the optimal farm size is around 20–40 mu both in terms of output efficiency and profit efficiency in Chinese agricultural production under the current agricultural technology and land management system.

Practical implications

The findings of this study suggest that appropriate land consolidation will bring more benefits to farmer households and agricultural production efficiency. There are some policy implications. First, governments should give long term and more stable land using rights to farmers through extending the period of land contract and verifying land using rights. Second, governments should encourage transfers of land using rights and promote land consolidation. But the implementation of this policy should consider regional differences and not be used for blindly pursuing increasing land size. Third, land consolidation should be accompanied with the development of specialized agricultural services.

Originality/value

The paper makes two major contributions to the literature. First, the authors use the SFA model to investigate the relationship between land size and agricultural production efficiency. Second, the authors establish two SFA models – the stochastic frontier output analysis model and the stochastic frontier profit analysis model – to estimate the optimal land size to achieve both output and profit efficiency of agricultural production in China.

Details

China Agricultural Economic Review, vol. 11 no. 1
Type: Research Article
ISSN: 1756-137X

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Article
Publication date: 20 August 2019

King Carl Tornam Duho, Joseph Mensah Onumah and Raymond Agbesi Owodo

The purpose of this paper is to investigate the impact of diversification on profitability, profit efficiency and financial stability of Ghanaian banks.

Abstract

Purpose

The purpose of this paper is to investigate the impact of diversification on profitability, profit efficiency and financial stability of Ghanaian banks.

Design/methodology/approach

The authors employed a panel regression technique on a data set of 32 banks from 2000 to 2015. The data envelopment analysis is used to compute profit efficiency scores with credit risk accounted for.

Findings

The results suggest that income diversification decreases profit, profit efficiency and financial stability. The impact on profit and stability is U-shaped. The impact of asset diversification was found to be insignificant. High competition reduces both profitability and profit efficiency which is inconsistent with the quiet-life hypothesis of Hicks (1935), but financial stability increases with competition. High investment in tangible assets is associated with poor performance. Non-banking financial institutions that later became universal banks are not financially stable. Competition, size, age, government ownership and leverage which are controlled for and a sensitivity analysis conducted also provided relevant insights.

Practical implications

The results are relevant in understanding the events in the Ghanaian banking industry in 2017–2018. Income diversification strategy is essential in determining the performance of banks. Management has to figure out the extent and scope of their diversification to benefit from the strategy.

Originality/value

The authors examined diversification from the view-point of both the income statement and statement of financial position while most prior studies focused on only one aspect. The study is one of the few studies that employed the risk-adjusted profit efficiency measure in Sub-Saharan Africa.

Details

International Journal of Managerial Finance, vol. 16 no. 1
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 16 February 2021

Navendu Prakash, Shveta Singh and Seema Sharma

The purpose of this study is to explore and evaluate potential nonmonotonicity in the determinants of profit efficiency, specifically IT and R&D investments in the Indian…

Abstract

Purpose

The purpose of this study is to explore and evaluate potential nonmonotonicity in the determinants of profit efficiency, specifically IT and R&D investments in the Indian commercial banking sector.

Design/methodology/approach

The study employs an alternative stochastic profit efficiency framework and introduces nonmonotonic effects by parameterizing the location and scale parameters of the inefficiency component on an unbalanced panel data set of 72 commercial banks in the 2008–2019 period. Marginal effects across quartiles are calculated using a bias-corrected and accelerated bootstrap procedure of 500 simulations. The study disaggregates across ownership and size for gauging the impact of structure on the associations between determinants of profit efficiency.

Findings

The study partially rejects the productivity paradox as it discovers a negative association of IT and R&D with profit inefficiency. However, the observed nonmonotonicity of IT is of significance for bank managers, as the study concludes that overinvestment in IT is detrimental to a bank’s profit-maximizing interests. Further, bank size, loan default and credit risk depict a nonmonotonic relationship across the sample with large banks, high NPAs and high credit risk associated with reducing profit efficiency. In addition, higher margins and greater diversification are related positively to efficiency, and banks with cost-heavy structures or having high liquidity risk associated negatively with efficiency.

Originality/value

To the best knowledge of the authors, the study is perhaps the first to acknowledge and incorporate nonmonotonic associations of IT investments amidst other exogenous determinants under a stochastic profit efficiency framework.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 15 August 2016

Thanh Nguyen

The purpose of this paper is to examine the effects of China’s accession to the World Trade Organization (WTO) in January 2002 on the efficiency levels, efficiency

Abstract

Purpose

The purpose of this paper is to examine the effects of China’s accession to the World Trade Organization (WTO) in January 2002 on the efficiency levels, efficiency components (technological change and scale economy), and efficiency determinants of Chinese banks.

Design/methodology/approach

This study employs a two-stage stochastic frontier analysis to estimate efficiency and its components and identify the efficiency determinants.

Findings

Chinese banks did not benefit from technological change and scale expansion in reducing costs in the pre-WTO period, but the reverse occurred in the post-WTO period. Chinese banks benefited from technological change in increasing profits to a lower degree in the post than the pre-WTO period. Cost efficiency declined while profit efficiency improved after China’s accession. Security investments positively drove profit efficiency in both pre- and post-WTO periods. There was an efficiency gap between joint-stock banks and state-owned banks in the pre-WTO period, but this gap disappeared in the post-WTO period. Economic freedom was related negatively to cost efficiency and positively to profit efficiency in the pre-WTO period, but opposite relations occurred in the post-WTO period.

Practical implications

These findings appear to favour gradual liberalisation in the Chinese banking system, gradual removal of restrictions on foreign banks, certain shift from non-security investments to security investments, technology investment and scale expansion.

Originality/value

This is the first study investigating the impact of the WTO on the efficiency, technological progress, economy of scale and efficiency determinants in Chinese banks.

Details

China Finance Review International, vol. 6 no. 3
Type: Research Article
ISSN: 2044-1398

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