Firm Efficiency and the Regulatory Closure of S&Ls: An Empirical Investigation

This paper uses a two-step methodology to examine the relationship between firm inefficiency and the regulatory closure of savings and loans (S & Ls). In the first step, using multiproduct, translog stochastic cost frontiers, we estimate inefficiency scores separately for mutual and stock S & Ls operating in the southwest in 1988. We use the inefficiency scores in second step logit models to identify determinants of regulatory closure. For both mutual and stock S & Ls, we find a significant positive relationship between firm inefficiency and regulatory closure. We also find a greater probability of closure for S & Ls in economically depressed states.