Financial institutions and productive efficiency: a redefinition and extension

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Title: Financial institutions and productive efficiency: a redefinition and extension
Author: Clement Jr., Norman
Abstract: Banks are found to have substantially lower average efficiency than indicated by previous studies . Efficiency is determined by sample size , the number of inputs and outputs of the model , the choice of input and outputs and the degree of homogeneity of the sample . Homogeneity appears to be one of the stronger drivers of average efficiency . Some intermediation models may be biased toward finding higher average efficiency and lack criteria to determine whether the intermediation process is profitable . The average bank is found to be competitive , but the low average efficiency scores found seems to be a result of a small percentage of banks that temporarily manage to attain some degree of super -efficiency . The inputs and the outputs used in data envelopment analysis are standardized by utilizing accounting definitions and foundational finance concepts . This allows modeling a bank’s productive process for the measurement of total productive efficiency and provides a way to include the profitability of a bank productivity process . This standardized model can then be extended to analyze other industries . Open -ended mutual fund efficiency is examined utilizing data envelopment analysis . Inputs and outputs are standardized and then extended utilizing the flexibility of the data envelopment analysis approach . Risk and return are modeled as joint outputs . This is consistent with the idea that there is a tradeoff between risk and return . Because of the joint nature of risk and return and their use as joint outputs , the approach used here does not require specifying the nature of the risk /return tradeoff . The effect of 12b -1 fees on mutual funds is examined from an efficiency point of view . Consistent with previous literature using much different techniques , the imposition of 12b -1 fees is found to be detrimental to fund efficiency . Funds with 12b -1 fees are shown to have higher expense ratios net of the 12b -1 fee than funds that do not have 12b -1 fees . Finally , funds that increase in efficiency are shown to do so by producing higher returns , generating fewer expenses and reduce their risk .
URI: http : / /hdl .handle .net /2346 /21238
Date: 2007-08

Citation

Financial institutions and productive efficiency: a redefinition and extension. Doctoral dissertation, Texas Tech University. Available electronically from http : / /hdl .handle .net /2346 /21238 .

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