Editorial
In this paper, the authors analyze cost and profit efficiency level and the managerial behavior of banks in nine Central and Eastern European countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania Poland, Romania, Slovakia and Slovenia), providing cross-country and time series evidence on the
period 1995–2002. A stochastic frontier analysis based on a Fourier flexible form indicates a generally low level of cost efficiency and an even lower level of profit efficiency. However, the authors also find significant differences among countries and some evidence of an increasing tendency over time in profit efficiency and, to an even stronger extent, in cost efficiency. Cost and profit efficiency scores are negatively correlated both on a country wide as well as on a bank by bank basis. Furthermore, instead of just looking at the determinants of cost and profit efficiency (e.g. asset quality, problem loans and risk), they test
several hypotheses of managerial behavior using the Granger causality approach based on the inter-temporal relation between bank efficiency, capitalization and problem loans, as proposed by Berger and DeYoung (1997). Even though a static analysis shows a negative correlation between problem loan and efficiency, the authors find no evidence of bad management hypothesis. Results provide evidence for the bad luck hypothesis suggesting the exogeneity of bad loans triggering inefficiency.