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Inefficiency source tracking: evidence from data envelopment analysis and random forests

  • S.I.: Regression Methods based on OR techniques
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Abstract

In the present era of complex environments, banks operate in a more dynamic environment, which in turn, affects their relative efficiency. Traditional Data envelopment analysis (DEA) models are widely used to measure efficiency. However, environmental/exogenous variables can significantly influence the DEA efficiency scores. Therefore, identifying the most important environmental variables is crucial in the evaluation of bank performances. This study introduces a three-stage DEA framework that employs a random forest as a powerful ensemble method for variable selection to search for the most influential environmental variables. The direction of influence of the selected environmental variables and their predictive power for predicting bank performances are investigated in the third stage, through a regression analysis. The proposed framework is tested with a sample of 110 banks in Middle East and North Africa countries, observed over a period of 3 years (2014 till 2016). Accordingly, a relevant set of environmental variables is identified and its effects on bank efficiency are studied. The findings indicate that the country where the bank operates has a significant effect on the bank’s efficiency. Results also show that the overall average efficiency score is stable (around 87%) for all banks. The study concludes with the limitations and suggested directions for further research.

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Notes

  1. Egypt, 19 banks; Lebanon, 18 banks; United Arab Emirates, 17 banks; Saudi Arabia, 11 banks; Jordan 10 banks; Oman and Bahrain 7 banks each; Qatar and Tunisia, 6 banks each; Iran 5 banks and Kuwait 4 banks.

  2. The excluded environmental variables are:

    Price earning index (P/E) It helps in evaluating the attractiveness of an investment. It is calculated as last closing price divided by latest trailing four-quarter earnings per share.

    Price book value It is the ratio of last closing price to the latest book value and indicates growth prospects.

    Beta is a relative measure of the systematic return of the stock to the overall market. Stocks with betas greater than 1.0 are highly volatile and have a positive correlation with the market; such stocks are termed aggressive securities.

    Capital structure (E/D) refers to the way a bank finances itself through some combination of equity

    Market share shows the extent of bank’s risks, as higher ratios of loans to total assets reveal the aggression of lending by the bank to increase profits.

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  1. Department of Management and Marketing, College of Business and Economics, Qatar University, P.O. Box 2713, Doha, Qatar

    Abdel Latef Anouze

  2. Department of Business Information and Decision Systems, Olayan School of Business, American University of Beirut, Beirut, Lebanon

    Imad Bou-Hamad

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Anouze, A.L., Bou-Hamad, I. Inefficiency source tracking: evidence from data envelopment analysis and random forests. Ann Oper Res 306, 273–293 (2021). https://doi.org/10.1007/s10479-020-03883-3

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