Corporate Governance and Stage-Wise Banking Efficiency: Evidence from a Multi-Layer Two-StageNetwork DEA Framework

Abstract

This paper revisits the issue of the relationship between corporate governance and banking efficiency by suggesting a stage-wise framework that separates operational performance and market performance. Most previous studies have mainly focused on efficiency as one of the outcomes, which ignores the mechanisms through which governance influences value creation. The analysis results were obtained after a two-step Network Data Envelopment Analysis (NDEA), Tobit regression, and a multi-layer governance model (individual variables, dimensions, and composite index) were used on panel data of commercial banks, which yielded a dual and asymmetric effect. Governance systems, especially those with a high level of monitoring, lower operational efficiency (Stage-1), as an indicator of coordination costs and managerial rigidity. On the other hand, there is the governance which increases the efficiency in the market/value (Stage-2) through increased transparency and investor confidence. Notably, there is a negative transmission effect, which suggests that market performance is not based on operational efficiency. The findings, in turn, contradict the belief of consistently positive governance effects and a trade-off between monitoring and value creation.