Bank efficiency scores impact risk-taking behavior and stock returns significantly.
The study compared two methods for measuring efficiency in U.S. bank holding companies. The linear programming method showed higher inefficiency scores than the stochastic method, but both methods ranked banks similarly. However, the stochastic method was found to be more informative, linking efficiency scores to risk-taking behavior, managerial competence, and bank stock returns. Therefore, decision makers should rely more on stochastic frontier efficiency estimates for this data set.