This paper provides a comparative analysis of the evolution of the technical efficiency of commercial banks in India and Pakistan during 1988-1998, a period characterized by far-reaching changes in the banking industry brought about by financial liberalization. Data Envelopment Analysis is applied to two alternative input-output specifications to measure technical efficiency, and to decompose technical efficiency into its two components, pure technical efficiency and scale efficiency. The consistency of the estimated efficiency scores are checked by examining their relationship with three traditional non-frontier measures of bank performance. In addition, the relationship between bank size and technical efficiency is examined. It is found that the overall technical efficiency of the banking industry of both countries improved gradually over the years, especially after 1995. Unlike public sector banks in India, public sector banks in Pakistan witnessed improvement in scale efficiency only. It is also found that banks are relatively more efficient in generating earning assets than in generating income. This is attributed to the presence of high non-performing loans. In addition, it is found that the gap between the pure technical efficiency of different size groups has declined over the years.

Using the Indian banking industry as a case study, this paper proposes and tests hypotheses regarding the possibility of a relationship between three elements of the Economic Reforms (ERs) - namely, fiscal reforms, financial reforms, and private investment liberalisation - and bank efficiency in developing countries. Bank efficiency is measured using data envelopment analysis (DEA); the relationship between the measured efficiency and various bank-specific characteristics and environmental factors associated with the ERs is examined using the OLS and the GMM estimations. Our results show an improvement in the efficiency of banks, especially that of foreign banks, after the ERs. We find a positive relationship between the level of competition and bank efficiency. However, a negative relationship between the presence of foreign banks and bank efficiency is found, which we attribute to a short-run increase in costs due to the introduction of new banking technology by foreign banks. Furthermore, we find that fiscal deficits negatively influence bank efficiency.

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Event studies typically use the methodology developed by Fama et al. [19699. Fama , E. , Fisher , L. , Jensen , M. and Roll , R. 1969 . The adjustment of stock prices to new information . International Economic Review , 10 ( 1 ) : 1 – 21 . [CrossRef] View all references. The adjustment of stock prices to new information. International Economic Review 10, no. 1: 1–21] to segregate a stock's return into expected and unexpected components. Moreover, conventional practice assumes that abnormal returns evolve in terms of a normal distribution. There is, however, an increasing tendency for event studies to employ non-parametric testing procedures due to the mounting empirical evidence which shows that stock returns are incompatible with the normal distribution. This paper focuses on the widely used non-parametric ranking procedure developed by Corrado [19896. Corrado , C. 1989 . A nonparametric test for abnormal security price performance in event studies . Journal of Financial Economics , 23 ( 2 ) : 385 – 95 . [CrossRef], [Web of Science ®] View all references. A nonparametric test for abnormal security price performance in event studies. Journal of Financial Economics 23, no. 2: 385–95] for assessing the significance of abnormal security returns. In particular, we develop a consistent estimator for the variance of the sum of ranks of the abnormal returns, and show how this leads to a more efficient test statistic (as well as to less cumbersome computational procedures) than the test originally proposed by Corrado (19896. Corrado , C. 1989 . A nonparametric test for abnormal security price performance in event studies . Journal of Financial Economics , 23 ( 2 ) : 385 – 95 . [CrossRef], [Web of Science ®] View all references). We also use the theorem of Berry [19413. Berry , A. 1941 . The accuracy of the Gaussian approximation to the sum of independent variates . Transactions of the American Mathematical Society , 49 ( 1 ) : 122 – 36 . [CrossRef] View all references. The accuracy of the Gaussian approximation to the sum of independent variates. Transactions of the American Mathematical Society 49, no. 1: 122–36] and Esseen [19458. Esseen , C. 1945 . Fourier analysis of distribution functions: A mathematical study of the Laplace–Gaussian law . Acta Mathematica , 77 ( 1 ) : 1 – 125 . [CrossRef] View all references. Fourier analysis of distribution functions: A mathematical study of the Laplace–Gaussian law. Acta Mathematica 77, no. 1: 1–125] to demonstrate how the distribution of the modified Corrado test statistic developed here asymptotically converges towards the normal distribution. This shows that describing the distributional properties of the sum of the ranks in terms of the normal distribution is highly problematic for small sample sizes and small event windows. In these circumstances, we show that a second-order Edgeworth expansion provides a good approximation to the actual probability distribution of the modified Corrado test statistic. The application of the modified Corrado test developed here is illustrated...