The efficiency of banks and stock performance: Evidence from Saudi Arabia

Abstract

The aim of this study is to extend the literature by extensively investigating the efficiency of banks in Saudi Arabia and examining its relationship with stock performance through relying on six measures of efficiency (three price efficiencies and three technical efficiencies). This study employs the data envelopment analysis (DEA) on all listed Saudi commercial banks over the period 2006–2018 ensuring the robustness of the results, and the multiple-regression analysis method is used to empirically test the impact of the efficiency changes on bank stock returns. The results indicate that Saudi banks are more technically efficient, and their price efficiencies are more volatile. Furthermore, changes in bank efficiency are positively related to stock performance; however, these positive relationships are only statistically significant with the changes in profit and scale efficiency measures implying that investors pay much attention to the improvement in bank profitability and future dividends.

Keywords:

• Saudi Arabia
• Bank efficiency
• DEA
• Price efficiency
• Technical efficiency
• Stock performance

PUBLIC INTEREST STATEMENT

The paper “The Efficiency of Banks and Stock Performance: Evidence from Saudi Arabia” discusses the efficiency of banks in Saudi Arabia and how their efficiency related to their stock performance. An efficient frontier analysis is used to identify inefficient units relevant to the best practice. The efficient frontier analysis is an advanced superior method to capture the performance of banks in comparison with the traditional financial ratio analysis. The paper used six measures of efficiency: profit efficiency (PE), revenue efficiency (RE), cost efficiency (CE), overall technical efficiency (OTE), pure technical efficiency (PTE), and scale efficiency (SE). Results showed that Saudi banks were technically efficient, and their price efficiencies were more volatile. Results also showed that efficiency measures were positively related to bank stock returns. Results could help investors in assessing bank stock performance. Finally, policymakers can better map out bank vulnerabilities by not neglecting the price efficiency of banks.

Notes

1. However, the present study sample of 12 Saudi banks meets the rule of thumb that achieves a reasonable level of discrimination (Dyson et al., 2001).

2. The input-oriented technical efficiencies are chosen as banks managers usually have more control over their inputs than their outputs that are affected by outside factors.

3. In the interest of brevity, for more technical details (see Cooper et al., 2007).

Additional information

Funding

The author received no direct funding for this research.

Notes on contributors

Mohammad Alsharif

Dr. Mohammad Alsharif was born in 1985 in Madinah, Saudi Arabia. He is an assistant professor of Finance at the Department of Finance and Economics at the College of Business Administration at Taibah University, Saudi Arabia. He has a Master’s degree in Finance from the University of Technology Sydney (UTS), Australia with a high distinction overall grade. He also holds a PhD in Finance from Putra Business School at University Putra Malaysia (UPM). His broad research interests include efficient frontier analysis, data envelopment analysis (DEA), Islamic banking, bank risk management and regulation, and Islamic REITs. He published several papers in high-ranked journals such as the Journal of Islamic Accounting and Business Research, Journal of Banks and Bank Systems, Journal of Managerial Finance, and Journal of Property Management.