A Transaction Cost Theory of Corporate Finance, with Applications to Security, Bankruptcy, and the Nature of Economic Organization

Bruce D. Johnsen

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: I use the stochastic econometric cost frontier approach to investigate efficiency of banks operating in the Third Federal Reserve District, which comprises the eastern two-thirds of Pennsylvania, the southern half of New Jersey, and Delaware. The results indicate that, in general, banks in the district are operating at cost-efficient output levels and production mixes. Thus, there appears to be little potential cost savings from banks’ changing their scale or scope of operations. However, I find a significant level of X-inefficiency at the banks, indicating potential cost savings from more efficient use of inputs. The second part of the article relates the inefficiency measures to several correlates.

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