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Impact of financial liquidity and solvency on cost efficiency: evidence from US banking system

Author

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  • Kekoura Sakouvogui
  • Saleem Shaik

Abstract

Purpose - The purpose of this paper is to evaluate the importance of financial liquidity and solvency on US commercial and domestic banks’ cost efficiency while accounting for internal and external factors. Design/methodology/approach - The Stochastic Frontier Analysis and Data Envelopment Analysis estimators are used to estimate the cost efficiency of 11,044 US commercial and domestic banks from 2005 to 2017. Using Tobit regression model, the importance of financial liquidity and solvency on cost efficiency is examined. Findings - The results provide evidence that the financial liquidity and solvency negatively impact the cost efficiency of US commercial and domestic banks. Overall, US commercial and domestic banks were inefficient during the financial crisis in comparison to the tranquil period. The importance of financial solvency on the cost efficiency was not statistically significant, while the financial liquidity negatively collapsed because of contagion. Finally, the results provide evidence that the amount of total assets matters in the improvement of the cost efficiency. Originality/value - This paper estimates and identifies the 2007-2009 financial crisis with liquidity, solvency or both financial factors.

Suggested Citation

  • Kekoura Sakouvogui & Saleem Shaik, 2020. "Impact of financial liquidity and solvency on cost efficiency: evidence from US banking system," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 37(2), pages 391-410, April.
    • Handle: RePEc:eme:sefpps:sef-04-2019-0155
    DOI: 10.1108/SEF-04-2019-0155
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    Citations

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    Cited by:

    1. Chien-Ming Huang & Wei Yang & Ren-Qing Zeng, 2020. "Analysis on the Efficiency of Risk Management in the Chinese Listed Companies," Mathematics, MDPI, vol. 8(10), pages 1-13, October.
    2. Nguyen, Thanh & Nghiem, Son & Bhati, Abhishek Singh, 2024. "Risk-adjusted efficiency and innovation: an examination of systematic difference and convergence among BRIC banks," Economic Systems, Elsevier, vol. 48(1).

    More about this item

    Keywords

    Liquidity; Solvency; Financial crisis; DEA; SFA; C01; C13; C54; C58;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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