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This paper utilises the non-parametric Data Envelopment Analysis (DEA) window analysis method to investigate the long-term trend in efficiency change of Singapore commercial banks during the period of 1993-2003. We found that listed Singapore commercial banks have exhibits an average overall efficiency of 95.4% thus suggesting input waste of 4.6%. Our results suggest that the small Singapore commercial banks have outperformed their large and very large counterparts. We further established statistical relationship between cost efficiency and share price performance by employing panel regression analysis. The evidence seems to indicate that the changes in stock prices tend to reflect cost efficiency albeit with small degree of reaction. This suggests that stock of cost efficient banks to some extend outperform cost inefficient banks
Key Words: Banks efficiency, DEA, Window Analysis, Singapore
JEL Classification: G21
I. INTRODUCTION
The Singapore government's decision to further liberalise the banking sector, which was relatively sheltered from international competition before the financial crisis of 1997-98, has contributed to the country's growing role as a financial centre for the region and a destination of choice for global investors. The banking sector in Singapore has grown rapidly and operated innovatively in recent years, becoming one of the main engines of growth and sources of employment. Face with these mounting competition, examination of banks efficiency in Singapore has therefore become an increasingly important issue for public and policy makers (Bhattacharyya et al., 1997, and Yeh, 1996).
On the other hand, in a semi-strong, efficient market where most of the information is incorporated into prices, stock value performance is, as it is widely accepted (Brealey and Myers, 1991), the best measure of estimating whether firms are creating value for shareholders or not. Studies on the stock market have found that stock prices do incorporate relevant publicly known information (Ball and Kothari, 1994). It may be expected that efficient firms perform better than inefficient firms do and this fact will be reflected in market prices (directly through lower costs or higher output or indirectly, through higher customer satisfaction and higher prices which in return may improve stock performance).
This paper attempts to combine these two literatures to explain and understand the relationship between estimated banks' efficiencies and its share prices. Specifically, working within the Singapore domestic...