A profit difference decomposition model for measuring group performance: an application to Chinese and Taiwanese commercial banks

Abstract

This research develops a new group-based profit difference model for comparing profit performance at the group level with heterogeneous production technology and currencies. The proposed model can fully measure component effects that contribute to cross-group profit variation and also explicitly accounts for the contribution of the exchange rate to the profit difference between groups. We employ panel data of 30 Taiwanese banks and 43 Chinese city banks over the period 2013-2019 as the two banking groups, showing empirical results that the latter perform better than the former in profit creation. The higher profits of the Chinese banks mainly are due to their better performance in price-related effects, which offset their worse performance in quantity-related effects. While Chinese city banks enjoy favorable price environments for activity expansion in China's high-growth financial market, Taiwanese banks are good at allocating proper input quantity to obtain better technical efficiency and technology. Findings also imply that Chinese city banks can further increase their profit gap by promoting productivity improvement, whereas Taiwanese banks could take advantage of China's favorable financial market and raise their cross-border investment.