Impact of liquidity risk on variations in efficiency and productivity: A panel gamma simulated maximum likelihood estimation

•The relationship between random error and one-side error is linked to productivity and efficiency, respectively. This helps to evaluate the importance of financial risks on efficiency and productivity independently.•An alternative panel estimator of normal-gamma stochastic frontier model is proposed using simulated maximum likelihood estimation techniques. This can be extended to alternative distributions.•Empirical estimates indicate difference in the parameter coefficients of gamma stochastic production function, and heterogeneity function variables between the pooled and the Swamy–Arora panel estimator.•Finally, the study indicates short and long run variations in liquidity risk play an important role in explaining the variance in inefficiency and productivity.

The objective of this study is to assess the importance of short- and long-run liquidity or debt risk on technical inefficiency and productivity. An alternative panel estimator of normal-gamma stochastic frontier model is proposed using a simulated maximum likelihood estimation technique. Empirical estimates indicate a difference in the parameter coefficients of gamma stochastic production function, and heterogeneity function variables between the pooled and the Swamy–Arora panel models. The results from this study show short and long run risk or variations in liquidity or debt-servicing ratio play an important role in explaining the variance in efficiency and productivity.