The Informativeness of Stochastic Frontier and Programming Frontier Efficiency Scores: Cost Efficiency and Other Measures of Bank Holding Company Performance

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: This paper examines the properties of the X-inefficiencies in U.S. bank holding companies derived from both stochastic and linear programming frontiers. This examination allows the robustness of results across methods to be compared. While we find that calculated programming inefficiency scores are two to three times larger than those estimated using a stochastic frontier, the patterns of the scores across banks and time are similar, and there is a relatively high correlation of the rankings of banks' efficiencies under the two methods. However, when we examine the "informativeness" of the efficiency measured by the two different techniques, we find some large differences. We find evidence that the stochastic frontier scores are more closely related to risk-taking behavior, managerial competence, and bank stock returns. Based on these findings, we conclude that while both methods produce informative efficiency scores, for this data set decision makers should put more weight on the stochastic frontier efficiency estimates. Terms of use: Documents inJEL classification: C13, C14, C21, D21, G21

Evaluating cost and profit efficiency: a comparison of parametric and nonparametric methodologies

“…These results are consistent with the studies that compare bank inefficiency between parametric and non-parametric approaches. For example, Eisenbeis et al (1999) found that calculated programming inefficiency scores of U.S. bank holding companies are two or three times larger than those estimated using a stochastic frontier.…”

Costs, revenues and performance in Spanish banking: a comparative analysis of pre- and early crisis years

“…In contrast, high and positive correlations were found by Resti (1997), based on a sample of Italian banks, Eisenbeis et al (1999), based on bank holding company data, and Cummins and Zi (1998), based on US life insurance firm data. If we extend the scope of the analysis to include studies outside the field of financial institutions, we find more empirical evidence comparing the two types of techniques such as studies by Banker et al (1986), De Borger andKerstens (1996), Hjalmarsson et al (1996), or Resti (2000).…”

Bank efficiency and stock returns

“…In an efficient market therefore, a change in cost or profit efficiency should be incorporated in the price formation process. Eisenbeis et al (1999) estimated the cost efficiency of a sample of large US bank holding companies, using both DEA and SFA approaches, examined the relationship between the efficiency and their risk-taking and stock price behaviour. Their results indicate that while both parametric and non-parametric efficiency estimates produce informative efficiency scores, the stochastic frontier efficiency estimates are more accurate in explaining stock price behaviour.…”