Decomposing the change in profit of Taiwanese banks: incorporating risk

Jia-Ching Juo ()

Journal of Productivity Analysis, 2014, vol. 41, issue 2, 247-262

Abstract: This study follows the structure of Grifell-Tatjé and Lovell (Manag Sci 45:1177–1193, 1999 ) and uses the non-parametric approach to decompose the change in profit of Taiwanese banks into various drivers. However, risk was never considered in the papers based on profit decomposition. Without considering risk, the empirical results will be biased while decomposing the change in profit. In fact, risk is a joint but undesirable output which cannot be freely disposed of by various regulations. The non-performing loan (NPL) is employed as a risk indicator for decomposing the change in profit in this study. This study also performs a three-way comparison among (1) the original Grifell-Tatjé and Lovell (Manag Sci 45:1177–1193, 1999 ) analysis (OGLA) model that ignores NPL, (2) the extended Grifell-Tatjé and Lovell (Manag Sci 45:1177–1193, 1999 ) analysis (EGLA) model that is based on the OGLA model and incorporates NPL, and (3) the directional distance function (DDF) model that is based on Juo et al. (Omega 40:550–561, 2012 ) and incorporates NPLs to see if incorporating the undesirable output matters. The decomposition of the change in profit in the above three models is then illustrated using Taiwanese banks over the period 2006–2010. Copyright Springer Science+Business Media New York 2014

Keywords: Profit change; Decomposition; Data envelopment analysis (DEA); Directional distance function (DDF); Risk; Undesirable outputs; C23; C61; D22; G21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s11123-012-0330-y

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