Thai Bank Efficiency during Economic Recovery Period and Its Relation to Stock Returns

Abstract

This study examines efficiency of 10 Thai commercial banks and their relations to stock returns. The analysis is conducted between 2001 and 2007 using a non-parametric frontier technique, Data Envelopment Analysis (DEA), to estimate profit efficiency. Then, the relationship between bank efficiency and stock return is examined. This paper makes key contributions to literature. To the best of author knowledge, this is the first study that investigates profit efficiency of Thai banks after the 1997 Financial Crisis. In addition, an important issue whether changes in a bank’s efficiency are reflected in stock prices is addressed. The main finding reveals that on average the profit efficiency of Thai bank is in the moderately high level at 85%. The results from the productivity analysis suggest that, on average, there is little improvement. Although Thai banks experienced an improvement in technical efficiency, this was partially offset by a contraction in their technology. Nonetheless, the total productivity of the restructured banks increased gradually and stood at a higher level than when the recovery period begins. Finally, this study shows that the relationship between changes in profit efficiency and stock returns appears that the profit efficiency measured can explain about 10% of stock returns movement. One of explanations may be that the information on bank efficiency might be outweighed by other market information during the recovery period.