Can Foreign Capital Participation Enhance Commercial Banks' Market Efficiency? - A Two-Stage DEA Test on the Chinese Listed Banks

The role of foreign capital participation in the recipients' efficiency has long been discussed, but so far no consensus has been reached on the impact of foreign capital participation on the commercial banks' efficiency Even less literature has studied the mechanism in which the foreign capital participation has influenced the commercial banks' efficiency. To investigate the mechanism, this paper has employed Ho & Zhu (2004) two-stage Data Envelopment Analysis (DEA) method to decompose banks' efficiency into operational efficiency (ability to expand their business with given inputs), and market efficiency (ability to make maximum profits with given business scale), and test the impacts of foreign capital participation on sixteen Chinese listed commercial banks' market efficiency. The Tobit regression method has been employed since the market efficiency measured with the two-stage DEA approach is always positive and hence not random. The findings indicate that the foreign capital participation has significant and positive impact on the Chinese listed commercial banks' market efficiency even as a minority shareholder, while the weight of the foreign ownership is not so important. Besides, the banks are all significantly influenced by macroeconomic fluctuations. These findings are important for both China and the other transitional economies and developing economies to improve the policies of financial liberalisation.