Assessing the Nexus Between Bank Efficiency and Stock Returns: Evidence From Indian Nationalized Banks

This study assesses the nexus between efficiency metrics and stock returns of Indian nationalized banks over a decade from2014-15 to 2023-24. Based on twelve nationalized banks operating in the country, the study employs Data Envelopment Analysis (DEA) approach to measure efficiency levels. To examine the impact of efficiency metrics on stock returns, regression analysis using panel data was carried out while controlling for banks profitability, size and earnings diversification. The findings exhibit that changes in efficiency metrics do not have a statistically significant positive impact on stock performance. Alternatively, profitability measures, especially Return on Assets (ROA), persistently and significantly describe stock prices, emphasizing the markets priority on bank profitability over operational performance. Furthermore, the results reveal structural shortcomings among the publicly owned banks in India.