Stochastic cost frontier analysis – a sensitivity analysis on cost measures

Abstract

Purpose

This paper aims to examine alternative methods for recording and treating costs in studies of bank efficiency.

Design/methodology/approach

This study used stochastic frontier analysis (SFA) models with core costs and total costs to estimate the cost efficiency of banks in two different economies, Vietnam where the banking system is under-developed (and thus is dominated by traditional banking activities) and New Zealand where the banking system is well-developed (and thus non-traditional banking activities play an important role).

Findings

The authors found that models using total cost tend to underestimate the banks’ cost efficiency. This underestimation relates to the extent of modern activities in a banking system: it is larger in an advanced banking system (i.e. New Zealand) and smaller in a less-developed banking system (i.e. Vietnam).

Research limitations/implications

Research is limited to two countries, and it would be useful to apply the same technique to other data sets.

Practical implications

The paper suggests a new approach to cost SFA studies in banking.

Originality/value

The paper provides a much more searching analysis of costs in banking than has generally been seen in previous research.

Citation

Ngo, T. and Tripe, D. (2016), "Stochastic cost frontier analysis – a sensitivity analysis on cost measures", Pacific Accounting Review, Vol. 28 No. 4, pp. 401-410. https://doi.org/10.1108/PAR-03-2016-0028