Date of Award

January 2015

Document Type

Thesis

Degree Name

Master of Science (MS)

Department

Economics & Finance

First Advisor

David Flynn

Abstract

The aim of this study is to assess the predictive ability of the bank efficiency ratio. The popular press, analysts and investors (individuals, institutions and other bank‘s looking for M&A targets) often use the bank efficiency ratio as a current measure of how efficiently a bank earns a dollar of profit for each dollar of expenditure. Implied in the usage of the ratio is that a bank that is performing well today will continue to perform better than peers in the future. To assess the predictive ability of the ratio, I grouped banks into quintiles of profit performance and used an ordered logit model with independent variables based on past literature on the determinants of bank profitability to predict the future relative performance of the bank. The efficiency ratio is found to be directionally correct in that a bank with a better relative efficiency ratio today tended to be a higher relative performer in the future. However, the efficiency ratio is not found to be the best indicator of future bank profitability. A bank‘s current ROA is found to be the most useful indicator in predicting the future relative performance of a bank.

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