Abstract
The primary objective of commercial banks is to maximize profit, but the usual ratio approach may encounter a problem when observed profit equals zero. This study uses the Nerlovian profit indicator, based on the difference rather than the ratio approach, to measure a profit efficiency indicator. We further decompose the profit efficiency indicator into technical and allocation efficiencies. The dataset consists of commercial banks from 1999 to 2007 in Taiwan. The empirical results show: (1) the shadow price affects the profit efficiency; (2) profit efficiency mainly comes from allocation efficiency; (3) the profit efficiency and allocation efficiency is better in old banks than in new ones; (4) the profit efficiency and allocation efficiency of banks belonging to a financial holding company are significantly higher than those not belonging to a financial holding company; (5) the diversification is really suitable for banking service in Taiwan. Key words: Nerlovian profit indicators, non-performing loans, undesirable output, directional distance function, profit efficiency.
Highlights
The primary purpose of commercial banks as well as manufacturing firms is to maximize profit
The shadow price of undesirable output means the cost that the bank has to spend to deal with the non-performing loan per dollar
Profit maximization is the primary objective of commercial banks as well as manufacturing firms
Summary
The primary purpose of commercial banks as well as manufacturing firms is to maximize profit. The usual ratio approach to measure efficiency, called indices, may not be appropriate since both maximum and observed profit may equal zero. This poses a problem in the ratio context. Färe and Grosskopf (2005) propose the Nerlovian profit indicator, based on the difference rather than the ratio approach, to measure profit efficiency, which could avoid the problem encountered by the ratio approach. Loans are one of the major outputs provided by a bank, but as loan is a risk output, there is always an ex ante risk for a loan to eventually become non-performing This poses a problem in the ratio context. Färe and Grosskopf (2005) propose the Nerlovian profit indicator, based on the difference rather than the ratio approach, to measure profit efficiency, which could avoid the problem encountered by the ratio approach.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
