This paper proposes a managerial control tool
that integrates risk in efficiency measures. Building on
existing efficiency specifications, our proposal reflects the
real banking technology and accurately models the relationship
between desirable and undesirable outputs. Specifically,
the undesirable output is defined as nonperforming
loans to capture credit risk, and is linked only
to the relevant dimension of the output set. We empirically
illustrate how our efficiency measure functions for managerial
control purposes. The application considers a unique
dataset of Costa Rican banks during 1998–2012. Results’
implications are mostly discussed at bank-level, and their
interpretations are enhanced by using accounting ratios.
We also show the usefulness of our tool for corporate
governance by examining performance changes around
executive turnover. Our findings confirm that appointing
CEOs from outside the bank is associated with significantly
higher performance ex post executive turnover, thus suggesting
the potential benefits of new organisational
practices.Peer ReviewedPostprint (author’s final draft
