Does managerial ability enhance banks' technical efficiency during uncertain periods?

Principal Investigator:
Chenyifan Jiang

Co-PIs:
Huiyi Ruan

Faculty Advisor:
Ahmed Alam

Abstract:
This paper empirically explores the interlinkage between economic policy uncertainty (EPU), managerial ability, and banks' technical efficiency. Taking a nonparametric approach, we use a data envelopment analysis (DEA) method to generate the bank-level efficiency scores. Based on a panel of US banks between 2011 and 2019, our results indicate a strong negative association between EPU and banking efficiency. This effect is valid for several components of EPU, such as the Federal, state, and local purchase disagreement, consumer price index, and tax-based EPU. Moreover, small and medium banks are more susceptible to increased uncertainty. Further analysis indicates that banks with better managerial quality remain more efficient during turbulent periods and this mitigation is persistent across the EPU components as well. The results are robust to a set of endogeneity tests based on propensity score matching (PSM) estimation. Our research findings offer important policy implications for bankers, regulators, and investors who are interested in efficient banking corporations during uncertain periods.