| dc.description.abstract | Concepts for measuring efficiency fall into three categories: revenue, cost and profit
efficiency. These concepts are based on an economic foundation for analyzing bank
efficiency because they focus on economic optimization in reaction to market prices,
competition and other business conditions, rather than being based solely on the use
of technology. The purpose of this study was to contribute further evidence on bank
efficiency in Kenya by defining alternative efficiency measures which are linked to
stock market returns of financial institutions. The study considered revenue, cost and
profit efficiency for Kenyan banks between 1998 and 2006. Besides, the study sought
to relate the changes in cost and profit efficiency to stock returns, using classical
regression models.
Using the DEA methodology, the findings established that the banks exhibited
declining cost efficiency over the sample period while the revenue efficiency was on a
steady increase. Malmquist total factor productivity (TFP) index measures showed
that technical efficiency and technological efficiency were the main drivers of profit
efficiency in the banking industry. This study also established that there exists a
significant relationship between stock returns and changes in both cost and profit
efficiency for the listed commercial banks. Cost efficiency influence stock returns of
banks since poor cost management lowers banks’ profits. Poor profits lead to low
future dividends to investors. Consequently, the share price will be bid down at the
stock market. Conversely, a bank which efficiently mobilizes its deposits, other funds
and staff earns high profits, translating into high dividends to investors and the share
will be highly priced which implies high stock returns. The findings in this study are
in agreement to empirical studies by Sakina (2006) and Joshua and Daehoon (2005) | en |
