Cost Efficiency and Foreign Ownership in the U.S.: Stochastic Frontier Analysis

Abstract: This study examines bank cost efficiency in the U.S. for the period 2008-2013. The main purpose is to investigate if foreign banks in the U.S. are less cost efficient than their domestic counterparts. I apply stochastic frontier approach which follows Battese and Coelli (1995) specification. Empirical results show significant associations of cost efficiency and bank-specific variables including leverage, size, output quality and performance indicators. The outcome of whether foreign banks are less cost efficient is inconclusive. I explain that heterogeneity in different bank groups can be a driving factor in inefficiency estimates thus more advanced methods are required in order to disentangle heterogeneity from inefficiency.