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

40 Pages Posted: 25 Jan 2015

See all articles by Robert Eisenbeis Eisenbeis

Robert Eisenbeis Eisenbeis

Independent

Gary D. Ferrier

University of Arkansas - Sam M. Walton College of Business

Simon H. Kwan

Federal Reserve Bank of San Francisco

Date Written: December 1999

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.

Keywords: stochastic frontier, data envelope analysis, X-inefficiencies, banks and bank holding companies, informativeness principle

JEL Classification: C13, C14, C21, D21, G21

Suggested Citation

Eisenbeis, Robert Eisenbeis and Ferrier, Gary D. and Kwan, Simon H., The Informativeness of Stochastic Frontier and Programming Frontier Efficiency Scores: Cost Efficiency and Other Measures of Bank Holding Company Performance (December 1999). FRB Atlanta Working Paper Series No. 99-23. Available at SSRN: https://ssrn.com/abstract=2491242 or http://dx.doi.org/10.2139/ssrn.2491242

Robert Eisenbeis Eisenbeis (Contact Author)

Independent ( email )

No Address Available

Gary D. Ferrier

University of Arkansas - Sam M. Walton College of Business ( email )

BA418, Dept. of Economics
Fayetteville, AR 72701
United States
501-575-6223 (Phone)

Simon H. Kwan

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3190 (Phone)

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