Dr' Honghui Deng

1
Dr. Honghui Deng
Are State Owned Banks Less Efficient? A Long-Run
vs. Short-Run DEA Analysis of Chinese Banks

• Assistant Professor
• College of Business Administration
• UNLV

2
Educational Background

• Ph.D., Red McCombs School of Business, University
  of Texas at Austin, 2002
• --MSIS, OR/OM, Finance
• --Co-Supervised by Dr.s William W. Cooper
  Patrick Brockett

3
(No Transcript)
4
Educational Background-Cont.

• Ph.D., Red McCombs School of Business, University
  of Texas at Austin, 2002
• --MSIS, OR/OM, Finance
• --Co-Supervised by Dr.s William W. Cooper
  Patrick Brockett
• Visiting Scholar, Red McCombs School of Business,
  UT-Austin, 1997-1999
• --Marketing Department
• MBA, College of Business Administration,
  Chongqing University, China, 1994
• --Marketing Finance
• B.E, Chongqing University, 1990
• --Electronic and Computer Engineering

5
Working Experience

• Academic Experience
• Assistant Professor, School of Business, the
  University of Nevada, Las Vegas
• Research Associate, Center of Risk Management
  Insurance, School of Business, University of
  Texas at Austin
• Instructor, MSSTC Program, The Innovation
  Creativity Capital Institute (IC2),
• Visiting Professor, Marketing Dept., School of
  Business, UT Austin
• Project Official, The Ministry of Education of
  China, Beijing, China
• Lecturer, College of Electronic Information
  Engineering, Chongqing University, China
• Industrial Experience
• Strategy Consultant ,Rapp Collins Inc. of Omnicom
  Group
• Ass. of Director Consultant ,IC2 and Texas
  Tech. Incubator
• Co-Founder CEO, HHD Consulting LLC.
• Membership
• The Institute of Operations Research and the
  Management Sciences (INFORMS)
• Association of Risk Management Insurance
• Association for Information Systems (AIS)

6
Current Research

• Operations Research
• Management Science
• Risk Management and Insurance
• Decision Science
• Data Communication Networks
• IT Strategy Organization
• Knowledge Management

7
Teaching Experience

• Project Management
• Supply Chain Management Operation Strategy
• Commercialization Strategy
• Data Communications Networks
• Management Information Systems
• Statistics
• Applied Information Technology

8
In the first half of the twentieth century
industry replaced agriculture, in the second half
of the twentieth century service has replaced
manufacturing -and right now, the knowledge
industry is beginning to replace the others.
--George Kotzmetzk
9
George Kotzmetzk
10
Stage of Knowledge Management

• A collection of data is not information.
• A collection of information is not knowledge.
• A collection of knowledge is not wisdom.
• A collection of wisdom is not truth.

11
Are State Owned Banks Less Efficient? A Long-Run
vs. Short-Run DEA Analysis of Chinese Banks

• W. W. Cooper
• Honghui Deng
• T. W. Ruefli
• Zongyi Zhang

12
Outline

• Executive Summary
• Literatures Review
• Choice of Variables and Data
• Methodologies
• DEA (Data Envelopment Analysis) Model
• Mann-Whitney rank order statistic
• Results
• with short run performance
• with long run performance
• Conclusions and Suggestions for further study

13
Executive Summary--Research motivation,
questions and results

• Motivation
• An efficiency comparison between China
  State-owned banks and Joint-stock banks in China
• Predict future performances for policy guidance.
• Research Questions
• What is the relative efficiency of these two
  types of banks under short-run performance?
• What is the relative efficiency of these two
  types of banks under long-run performance?
• Results
• Joint stock banks are more efficient in the short
  run
• Neither types of banks is superior in the long
  run

14
Executive Summary --contributions

• We have developed a new application for
  distinguishing between managerial and
  technological inefficiencies.
• We also developed a new method to differentiate
  short-run and long-run performances with only
  contemporary data
• Joint-stock banks are relatively new to China
  have more modern management and access to
  international finance markets while state owned
  banks generally use government funding. Hence,
  using Mann-Whitney rank order statistics produces
  results in favor of joint stock banks in the
  short run but not in the long run
• Furthermore, the results are also consistent with
  the movement to a Knowledge Economy as seems to
  be occurring in U.S.

15
Literature Review

• Chinese Literatures
• Huang, X (1998), Wang, G.H (2002), Wei and Wang
  (2000), Zhang, J.h (2003), Zhao, Xue and Yin
  (1999), Zhou (1994)
• Western Literatures
• Barua at el.(2004), Brockett et al. (1984),
  Cooper at el. (1999, 2001, 2006, 2007), Deng
  (2003), Emrouznejad and Podinovski (2004),
  Hefferman (2007), Ray, S.C (2007)

16
Overview of the Chinese Banking System

• Prior to 1979
• The Peoples Bank of China
• 1980s-Four Major State Owned Banks
• The Industrial and Commercial Bank of China
• The Agricultural Bank of China
• The Bank of China
• The Chinese Construction Bank.
• 1990s-Joint Stock Banks
• China Merchant Bank, CITIC Industrial Bank,
  Shenzhen Development Bank, Fujian Industrial
  Bank, Guangdong Development Bank
• China Everbright Bank, Huaxia Bank and Shanghai
  Pudong Development Bank, China Minsheng Banking
  Corporation
• The first city commercial bank was organized in
  Shenzhen in February, 1992, as of 2005, 112
  cities have been established their banks.

17
Choice of Data
18
Variables Used

• OUTPUTS 
• 1. Total Loans.
• 2. Investments in securities and other assets
• 3. Interest income from loans and other business
  
• INPUTS 
• 1.   Labor cost
• 2. Fixed assets
• 3. Administrative and operating expenses

19
Methodology--DEA

• DEA
• A relatively new method for Evaluating
  performances of complex entities and making
  inferences from empirical data.
• Examplerelative efficiency of courts, schools,
  hospitals, etc., as well as business firms
• Based on few assumptions
• Input used
• Output produced
• Decision Making Units (DMUs) responsible for
  connecting inputs into outputs
• Note does not requires weights such as prices
  and does not requires relation between input and
  output to be specified

20
ExampleHow does DEA work

• Uses frontier (called efficient frontier) rather
  than central tendency (e.g., as in statistics) to
  evaluate performances of all DMUs relative to the
  frontier
• Performance of D can be evaluated relative to S
  or T to obtain what in economics is called
  technical efficiency. We refer to it as
  managerial inefficiency
• Always yields following results
• An overall efficiency score
• The amount of inefficiency in each input and
  output

21
Model--Data Envelopment Analysis

• Output Oriented model with s outputs and m inputs
• where amount of rth output produced by
  DMUj, r1,s,
• amount of ith input
  produced by DMUj, i1,m
• and DMUo is the DMUj to be
  evaluated
• amount of rth output produced by DMUo,
  r1,s,
• amount of ith input produced by DMUo,
  i1,m

22
DEA Model--cont.

• This is called the Envelopment model because it
  is used to develops a piecewise linear frontier
  which envelop the output from above and the input
  from below. See the inequalities in the above
  model
• This model is applied to each DMU in sequence,
  one at a time, as each DMUj, j1,n, is
  designated as the DMUo to be evaluated
• Computation For computation we introduce slacks
  to obtain the following equivalent model

23
Model--DEA cont.

• BCC model--Output Oriented Version.
• where the , are slacks

24
DEA Analysis-cont.

• Definition 1 Full efficiency is attained by DMUj
  DMUo, the DMU to be evaluated, if and only if
  it is not possible to improve any input or output
  without worsening some other input or output for
  this DMUo
• Definition 2 DMUo is fully (DEA) efficient if
  and only if the following two conditions are both
  fulfilled
• (i)    , and
• (ii)  All slacks are zero.

25
Application

• Apply the above model to each DMUo to obtain
  efficiency score from the optimal solution
• Rank the relative efficiency score for each
  State-owned Bank and Joint-stock Bank and apply
  the Mann-Whitney rank order statistic to see if
  there are statistically significant differences
  as to whether Joint-stock Bank outrank
  State-owned Bank or vice versa

26
Table 1 An example result sheet after applying
(2) and its rank for Mann-Whitney rank order
statistic
27
Mann-Whitney rank order statistic

• Four-Steps
• Rank all DMUs by their relative efficiency --
• Compute the sum of all ranks for Joint Stock
  Bank. This is labeled R
• Mann-Whitney rank statistic
• For sample sizes ,
  approximates to normal with

28
Hypotheses Tests

• Both types of bank are equally efficient
  in their performance
• One type of bank is more efficient than
  the other
• If accept
  .
• If then State Owned Banks
  more efficient
• If then Joint Stock
  Banks more efficient

29
Hypotheses Tests--cont.

• If ,
• If ,

30
Table 4 Mann-Whitney Values in Short Run

• n1 number of Joint Stock Banks
• n2 number of State Owned Banks

31
Results in Short run Performance

• Table 4 shows that the customary significance
  levels (i.e., significance of 10 with
  ) are achieved.
• Hence, we can conclude
• it is statistically significant, in short run,
  Joint Stock Banks is superior in efficiency
• The Joint-stock banks are relatively new to China
  have more modern management and access to
  international finance markets while state owned
  banks generally use government funding. The State
  Owned banks may not have achieved their full
  capabilities. This motivated us to extend our
  analysis to long run performance.
• Note the efficiencies we have used reflect both
  managerial inefficiencies and technological
  capabilities. We now seek to separate the two so
  we can detect long run inefficiency
  possibilities.

32
Long Run vs. Short Run Performance --performance
properties

• In the short run managerial inefficiencies may be
  present due to managerial performances that fall
  short of what is technologically possible
• We therefore proceed as follow
• We evaluate both types of banks separately to
  develop 2 frontiers and evaluate managerial
  performances of each type of bank relative to
  their technological possibilities
• We eliminate technical inefficiencies (
  managerial inefficiencies) by using DEA to
  project each DMU onto its respective frontier.

33
The two projection
34
Data Envelopment Analysis--Projection Formula

• Measure of inefficiencies
• Result
• are points on the efficient
  frontier used to evaluate the DMU being evaluated
• Project every point onto its frontier by the
  above formula

35
Long-run performance--Simultaneously Evaluate
Technology and its Management

• We then continue to long run analysis--to show
  how to evaluate the two technologies as follow
• 1. Develop a new frontier from these two
  individual frontiers and re-apply DEA that can
  evaluate the 2 technologies by these DMU(firms)
  on their 2 frontiers
• 2. Rank the DMUs in terms of their new DEA
  efficiencies and compute Mann-Whitney rank order
  statistics

36
Example In this example we have used DEA to
develop a new frontier to evaluate the two
technologies relative to each other
37
Short run vs. Long run
38
Table 5 Mann-Whitney Values for Long Run
Efficiency
n1number of Joint Stock Banks n2number of State
Owned Banks
39
Results for Long run Efficiency

• Table 5 shows that none of the customary
  significance levels (i.e., significance of 10
  with ) are achieved.
• Hence, we can conclude
• Although Z value is generally negative, it is not
  statistically significant, in short run neither
  is superior in efficiency
• Note We refer to the new curve as the long run
  technology because it satisfies the properties
  assigned to this new frontier in the long run
  in economics. The properties are
• All managerial inefficiencies have been removed
• The long run technology frontier is at least as
  good as any of the short run technologies at
  every point in the original data

40
Conclusions

• Combine both short run and long run results, we
  conclude that
• Neither types of banks is superior in the long
  run
• Joint Stock Banks are more efficient in the short
  run.
• Contributions
• We have developed a new application for
  distinguishing between managerial and
  technological inefficiencies.
• We also developed a new method to differentiate
  short-run and long-run performance with only
  contemporary data
• This application suggests that the development of
  Chinese banks will continue to move toward
  globalization.
• Furthermore, the results are also consistent with
  the movement to a Knowledge Economy as seems to
  be occurring in U.S.

41
Further Study

• Our method can be applied to any situations other
  than the one we studied here
• Combine what we did with the regressions used by
  others who could not distinguish between
  efficient and inefficient performances in their
  analysis

42
Q A