Effects of heterogeneity on measuring efficiency scores: The case of China's banking sector

Banks play a central role in the financial system and also in the real economy, as the 2008 financial crisis has vividly illustrated. The measurement of banking performance has gained importance for both policy makers and practitioners in relation to their decision making. Hence, empirical assessment of the efficiency of banking institutions has received considerable attention in the banking literature (see Berger and Humphrey, 1997; Berger, 2007; Fethi and Pasiouras, 2010 for a comprehensive review of banking efficiency studies). However, efficiency measures can vary substantially across different samples and empirical specifications, which may limit the use of efficiency measures by decision makers. Some previous studies (e.g., Bauer et al., 1998; McKillop et al., 2005; Bos et al., 2009) have compared the efficiency of financial institutions which is obtained using different approaches or specifications. They reported that efficiency scores vary considerably across different models. Therefore, choosing an appropriate frontier model is very important for measuring banking efficiency.