Stock Market Performance and Efficiency of Banks in a Developing Economy: Evidence from the Indian Banking Sector

Many studies have been conducted on bank efficiency and bank performance both in developed and developing economies. Although abundant research on the association of emerging dimensions of stock performance with bank efficiency is available for the developed countries, such research in developing economies is limited. In the light of this, a model is constructed with stock market return as the principal variable along with bank efficiency and bank-specific factors and tested for the Indian economy. The model was developed using data envelopment analysis (DEA) for Indian banks. Panel data regression analysis was used to examine the empirical association between efficiency measures and market performance measures. The regression results confirmed the presence of a statistically significant association between operational efficiency and market performance of Indian banks. Operationally efficient banks create more value and returns to their investors and are thus found to be effective