Faculty Publications

An Entropy Approach To Size And Variance Heterogeneity In U.S. Commercial Banks

Document Type

Article

Keywords

Commercial Banks, Cost Frontier, Heteroskedasticity, Maximum Entropy

Journal/Book/Conference Title

Journal of Economics and Finance

Volume

36

Issue

3

First Page

728

Last Page

749

Abstract

In this paper, we investigate the effect of bank size differences on cost efficiency heterogeneity using a heteroskedastic stochastic frontier model. This model is implemented by using an information theoretic maximum entropy approach. We explicitly model both bank size and variance heterogeneity simultaneously. We find that non-performing loans, federal insurance premium, legal expenses and director fees drive bank inefficiency as the bank becomes larger. Moral hazard, bank management and a "too big to fail" doctrine are likely explanations for the results from this study. © 2010 Springer Science+Business Media, LLC.

Department

Department of Finance

Original Publication Date

7-1-2012

DOI of published version

10.1007/s12197-010-9148-5

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