Abstract
This paper examines the relationship between bank efficiency change and stock price returns. We first estimate the cost and profit efficiency of a sample of Asian and Latin American listed banks over the period 2000-2006 while controlling for cross-country differences such as regulations and the macroeconomic environment. We then regress the annual efficiency changes on stock returns. The results indicate a positive and robust relationship between profit efficiency changes and stock returns. However, we find no evidence that cost efficiency changes are reflected in stock returns. We also find that profit efficiency better explains bank stock returns compared to traditional accounting profits measures (ROE). Overall, we conclude that profit efficiency measures include useful information for shareholders wishing to explain bank stock returns.
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