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Efficiency and credit rating in Taiwan banking: data envelopment analysis estimation

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Abstract:

In this article, we use the data envelopment analysis to measure the efficiency of banks before and after credit rating is taken into consideration and we also employ the Malmquist Productivity Index to measure the total factor productivity changes from 2001 to 2003. The results are as follows: (1) There is a positive relationship between the efficiency scores and credit rating, and thus, the credit rating can be a representative to evaluate the performance and quality of a bank; (2) We use the Wilconxon two-sample test of nonparametric statistic to test the influences of credit rating. The empirical result shows that the credit rating is proven to influence the efficiency of banks; (3) The efficiency scores improve in both investment grade (above tw BBB-) and speculation grade (under tw BBB-), when credit rating is taken into consideration. The empirical results show that the efficiency scores of banks with a high credit rating improved relatively more when compared to banks with a lower credit rating; (4) In this research we also adopt the Malmquist index to observe the productivity and efficiency changes from year to year. We obtain results whereby the improvement of efficiency may be influenced greatly both from pure technical and scale efficiency changes.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840801964443

Affiliations: 1: Department of Economics, Soochow University, Taipei 100, Taiwan, Republic of China 2: Department of Accounting, Soochow University, Taipei, Taiwan, Republic of China 3: Jih Sun International Bank, Taipei, Taiwan, Republic of China

Publication date: August 1, 2010

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