Do Mergers Improve the Efficiency of Banks in Taiwan?: Evidence From Stochastic Frontier Approach

Abstract

Banking consolidation is a global trend, but in Taiwan, after the failure of the Second Financial Reform, it does not have a clear policy for bank mergers. This paper investigates whether mergers influence the cost efficiency of banks in Taiwan, and our results suggest that the government should utilize market mechanism to encourage FHC or large banks" mergers. We use the method of stochastic frontier approach (SFA) to investigate the uncertain relationship between merger and the cost efficiency of Taiwanese banks. Based on Battese and Coelli (1995), we use maximum likelihood estimation method to estimate the stochastic cost efficiency model and the inefficient model simultaneously. We find that, for Taiwanese banks, technology efficiency increases with time by lowering operation cost; cost efficiency decreases right after merger, and has to wait for three years to regain efficiency. The larger banks and FHC banks benefit more from cost savings than smaller banks. JEL Classification: G21, G34

The Impact of Mergers and Acquisitions on Financial Performance of Banks in the Kingdom of Bahrain during 2004-15

“…This test implies that for all banks, there has been no significant difference between the CAMEL ratios in the pre-merger period and the post merger periods. This is similar to the results of evaluation of the mergers and acquisitions of banks in countries such as Pakistan by Abbas et al (2015), Sufian et al (2012) in Malaysia, Lee et al (2013) in Taiwan and Vitale and Laux (2012) in the USA where no significant improvement in the financial performance of firms have been observed after the merger. However, the results of studies in Europe by Ayadi et al (2013) show massive productivity gains by banks in the post merger period.…”

“…This means that the financial performance of the banks did not improve after the M&A. These results are similar to studies in other geographical areas, namely Pakistan, USA, Malaysia, and Taiwan (Abbas et al, 2015;Vitale & Laux, 2012;Sufian et al, 2012;Lee et al, 2013).…”

“…The second component of CAMEL is Asset Quality. According to Lee et al (2013), performance of the loans and financing instruments granted by the bank determines the quality of its assets and the degree of its financial strength. Asset quality, as stated by Knapp & Gart (2014), can be measured by determining the proportion of bad loans and facilities in the loan book.…”

“…Additionally, decreases in profitability, efficiency, liquidity and leverage ratios were reported. Lee et al (2013) found that the cost efficiency decreased immediately after M&As of Taiwanese banks; however, it took around three years to regain efficiency.…”

Impact of Banking Supervision on the Cost-Efficiency of Banks: A Study of Five Developing Asian Countries

“…With regard to such issues as banking efficiency in Asian countries, most developed countries place great importance on the share structures (Fukuyama et al, 1999;Morck et al, 2000), mergers and acquisitions (Lee et al, 2013) and size of McKillop et al (1996); Drake et al (2006) and impact of financial crisis on Huang et al (2014) public and private institutions.…”