A frontier analysis comparison of banking ‘added value’

Margaret Brown and Edward P.M. Gardener

The Service Industries Journal, 2004, vol. 24, issue 4, 41-65

Abstract: Recently, a new added value to inputs (AVI) ratio has been developed for ranking banks by their ‘competitive advantage’. This kind of market-based measure of performance is now being widely developed in banking. The primary aim of this article is to use the data envelopment analysis (DEA) technique to expose some of the underlying properties of AVI: a comparative simulation exercise is used to perform an exploratory sensitivity and critical variable analysis. It is shown that the AVI scalar ratio embodies inter alia a hidden assumption of constant returns to scale, and it corresponds to the simplest possible form of DEA model. Another aim is to generalise and improve the AVI approach using DEA. More insight is obtained by applying DEA, which allows for explicit assumptions about returns to scale and provides multi-dimensional forms of AVI measures.

Date: 2004
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DOI: 10.1080/0264206042000275181

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The Service Industries Journal is currently edited by Eileen Bridges, Professor Domingo Ribeiro, Ronald Goldsmith, Barry Howcroft and Youjae Yi

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