Efficiency and managerial control in financial institutions

Abstract

Studies measuring the efficiency levels of financial institutions including the banks and insurance companies have dramatically boosted in the efficiency and productivity analysis literature especially during the last two decades. The undesirable output sets that are under the control of managerial bodies in the financial institutions stimulate researchers to explain the potential relationship between the managerial control and inefficient usage of resources in this particular industry. Besides, the risks occurred throughout the decision-making process within the financial institutions started to be integrated into the efficiency analysis of financial sector. The primary goal of this chapter is to summarize and critically review the theoretical and empirical literature on the efficiency and managerial control in the financial institutions as well as to put forward a set of arguments about this specific discussion. Secondarily, recent efficiency literature leans towards to the inefficiency of foreign-owned financial institutions (i.e. banks) in regards to performance. Estimated efficiency frontiers of foreign-based banks compared to domestic banks are found to be lower; therefore, international consolidation efforts are argued to be slow in this industry. On the other hand, the international diversification has still been on the agenda of the mainstream portfolio prescriptions. Considering these arguments, this chapter also seeks to highlight the recent empirical works aiming to continue this intellectual conversation.