This paper proposes a managerial control tool that integrates risk in efficiency measures. Building on existing efficiency specifications, our proposal reflects the real banking technology and accurately models the relationship between desirable and undesirable outputs. Specifically, the undesirable output is defined as non-performing loans to capture credit risk, and is linked only to the relevant dimension of the output set. We empirically illustrate how our efficiency measure functions for managerial control purposes. The application considers a unique dataset of Costa Rican banks during the period 1998–2012. The results’ implications are mostly discussed at bank-level, and their interpretations are enhanced by using accounting ratios. We also show the usefulness of our tool for corporate governance by examining performance changes related to executive turnover. Our findings confirm that appointing CEOs from outside the bank is associated with significantly higher performance ex post executive turnover, thus suggesting the potential benefits of new organisational practices.
Mircea Epure is Assistant Professor in the Department of Economics and Business at Pompeu Fabra University. He holds a PhD degree from the Department of Business Economics and Administration at Universitat Autonoma de Barcelona. Mircea’s research focuses on management and accounting topics in economic organisations. Prof. Epure teaches Competitive Benchmarking at UPF Barcelona School of Management.
Esteban Lafuente, Universitat Politècnica de Catalunya (Barcelona Tech).