Effects of Heterogeneity on Measuring Efficiency Scores: The Case of China's Banking Sector

in Experiences and Challenges in the Development of the Chinese Capital Market, edited by Douglas Cumming, Alessandra Guariglia, Wenxuan Hou, Edward Lee Palgrave Macmillan, 2015

27 Pages Posted: 28 Apr 2015

See all articles by Yizhe Dong

Yizhe Dong

University of Edinburgh Business School

Douglas J. Cumming

Florida Atlantic University

Alessandra Guariglia

University of Birmingham - Department of Economics

Wenxuan Hou

University of Edinburgh - Business School; University of Edinburgh - Business School; Shanghai Lixin University of Accounting and Finance

Edward Lee

University of Manchester - Alliance Manchester Business School

Date Written: April 26, 2015

Abstract

This study aims to investigate the significance of adequately accounting for heterogeneity in banking efficiency. It compares different specifications of stochastic cost frontier models which attempt to account for bank heterogeneity in various ways. This study compares the estimated parameters from five different specifications, conducts a specification test and discusses the effect of accounting for the heterogeneity on efficiency scores and rankings. The findings indicate that heterogeneity across banks could influence production directly, through the cost frontier, or indirectly through its effect on efficiency. This study concludes that accounting for the heterogeneity in the sample of Chinese banks is an important issue which, if not taken into account, may lead to biased estimates of banking efficiency.

Keywords: Cost efficiency; Stochastic frontier analysis; Heterogeneity; Chinese banking

JEL Classification: C52 D24 G21

Suggested Citation

Dong, Yizhe and Cumming, Douglas J. and Guariglia, Alessandra and Hou, Wenxuan and Hou, Wenxuan and Lee, Edward, Effects of Heterogeneity on Measuring Efficiency Scores: The Case of China's Banking Sector (April 26, 2015). in Experiences and Challenges in the Development of the Chinese Capital Market, edited by Douglas Cumming, Alessandra Guariglia, Wenxuan Hou, Edward Lee Palgrave Macmillan, 2015, Available at SSRN: https://ssrn.com/abstract=2599210

Yizhe Dong (Contact Author)

University of Edinburgh Business School ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://sites.google.com/view/douglascumming/bio?authuser=0

Alessandra Guariglia

University of Birmingham - Department of Economics ( email )

United States

Wenxuan Hou

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Shanghai Lixin University of Accounting and Finance ( email )

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

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