Efficiency and Stock Performance in European Banking

Abstract

During the past decades, competitive pressures have increasingly driven banks to change the strategic focus on generating returns to shareholders. All things being equal, cost efficient banks should be more profitable and therefore generate greater shareholder returns. The purpose of this paper is to contribute further evidence on bank efficiency by defining alternative efficiency measures and investigating the link between such measures and the market performance of financial institutions. Employing Data Envelopment Analysis (DEA) and Stochastic Frontier Approach (SFA) we estimate measures of bank cost efficiency for a sample of European banks listed in the year 2000. The results seem to indicate that percentage change in stock prices reflect percentage change in cost efficiency, particularly those derived from DEA. This suggests that stocks of cost efficient banks tend to outperform their inefficient counterparts.

Keywords: Efficiency, Market performance, DEA, SFA, European Banking

JEL Classification: G21