The influence of banks' internal performance on market performance: a non-parametric approach

The purpose of the study is to determine the degree to which banks' market performance, as measured by market value ratios, is affected by their internal performance. Annual financial statement reports were used to determine the internal and market performance of listed banks on the JSE Limited over a ten-year period. The internal performance measures used are the profitability ratios in the Du Pont analysis and two Data Envelopment Analysis (DEA) models to estimate efficiency. Income statement data were included as the output of the first model to determine banks' operating efficiency, and balance sheet data were included as the output of the second model to determine banks' finance and investment efficiency. The study concluded that market value ratios correlate better with profitability ratios than the income statement output-based and balance sheet output-based efficiencies. This study is the first to compare two DEA models and profitability ratios with market value ratios. The value of the study is therefore that it indicates that profitability ratios should be used as a proxy for market value ratios rather than efficiency measures that focus separately on income statement data and balance sheet data.