Does Bank Efficiency Matter? Market Value Relevance of Bank Efficiency in Australia

Abstract

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.