DOES EFFICIENCY CONTRIBUTE TO MARKET VALUATION OF BANKS? EVIDENCE FROM TURKISH BANKING SYSTEM

Year 2019, , 9 - 13, 30.07.2019

Serpil Kuzucu Narman Kuzucu

https://doi.org/10.17261/Pressacademia.2019.1056

Abstract

Purpose- Operational efficiency is one of the strategic
concerns for bank management. The aim of our study is to investigate the effect
of operational efficiency on banks’ market valuation.

Methodology- We empirically examine the way in which the financial
market evaluates different efficiency measures of banks, using a panel data of
listed banks at Borsa Istanbul for the years 2010 – 2017. We employ three
different efficiency measures as proxies. Those are i) operating expenses
compared to total net income, ii) total net income per branch, and iii) total
net income per employee.

Findings- We find that cost efficiency, interest income as
return on equity (ROE) and loan loss provisions (LLPs) are found to be
statistically significant drivers of market valuation of banks.  We use
risk-weighted assets to total assets as a measure for risk-taking behavior of
banks. The results suggest tentative findings for risk-taking behavior of
banks. The findings also suggest that bank size and non-interest income as ROE
do not significantly influence bank market valuation.

Conclusion- We conclude that operating expenses compared to total
net income as an efficiency measure is a determinant of market valuation of
banks while income per branch and income per employee as efficiency measures
are not related to market valuation of banks. Thus, we recommend bank managers
boost net interest income while avoiding credit losses, and drop off operating
costs compared to revenue in order to maximize bank’s market valuation. 

Keywords

Bank efficiency, bank management, market value, panel data, Turkish banking system

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