Does Bank Efficiency Matter? Market Value Relevance of Bank Efficiency in Australia
32 Pages Posted: 15 Oct 2010
Date Written: October 12, 2010
The stochastic frontier analysis is employed to investigate efficiency of publicly listed Australian banks over the period 1985-2008. The results suggest that technical, cost and profit efficiency of Australian banks have improved over our sample span. Large banks have attained a higher level of cost efficiency but lower level of technical efficiency compared to small banks. No significant difference between the two groups is found in terms of profit efficiency. A pooled regression of bank stock return on bank efficiency suggests that an improvement in technical, cost or profit efficiency contributes to the market value of a bank. Thus, the shareholder wealth maximization goal is aligned with the goal of maximizing bank efficiency in the Australian context.
Keywords: Bank efficiency, SFA analysis, Distance functions, Market model
JEL Classification: D61, G21, G34
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