Efficiency and Profitability Test of Investment Firms: A Comparison between the UK and Italian Industries

Abstract

This paper investigates the influence of environmental variables on the cost efficiency of the UK and Italian investment firms over the period 1995-1998, by employing four different specifications of the stochastic frontier methodology using a translog cost function in order to measure X-efficiency. The empirical findings show the importance of integrating environmental variables into the definition of the cross-country common frontier. The traditional common frontier reveals that Italian investment firms are nearly as efficient as the UK firms. Nevertheless, when institutional and interpretational variables are included in the model, differences between the two industries emerge. Finally, to identify investment firms that are both cost and profit efficient, we undertake a profitability test.

Keywords: Investment Firms, Cross-countries comparison, Cost efficiency, Profitability

JEL Classification: D5, G24, G28