Unveiling the Endogenous Relationship Between Technical Efficiency and Value Creation in Mergers and Acquisitions in Nigeria

Abstract

There is a growing literature on how the beneficial impacts of horizontal mergers and acquisitions (M&A) should be measured. Thus far, however, there have been few studies addressing endogeneity between technical efficiency and value creation: they tend to present a bidirectional and simultaneous relationship. This research contributes to the debate by investigating the impact of voluntary horizontal M&A on these metrics in Nigeria between 1995 and 2012, in light of the individual performance of bidders, targets, and the resulting corporate companies. First, technical efficiency, technology gap ratio, and returns‐to‐scale estimates were computed based on a meta‐frontier DEA approach, together with a set of contextual variables that encompass performance indicators which reflect the value creation process. Then, robust regressions were used to discriminate these efficiency estimates in terms of such business‐related variables, correcting for endogeneity and controlling for industry and trend effects. The results reveal that these contextual variables significantly impact virtual efficiency and returns‐to‐scale levels, and that there is a trade‐off between efficiency and value creation at some point in the merging process. Managerial implications are derived.

Does ownership structure affect firm performance? Evidence of Indian bank efficiency before and after the Global Financial Crisis

“…However, within the literature dealing with nonparametric techniques used to estimate technical efficiency, like DEA, the issue of endogeneity has not received much consideration. To the best of our knowledge, only a few studies —often in fields other than banking— attempt to test the potential distortions within these models (see, for instanceOrme and Smith, 1996; ; Bifulco and Bretschneider, 2001; Ruggiero, 2004; see and Akpan et al., 2020; Kweh et al., 2021; Mergoni and De Witte, 2022, for a detailed review on endogeneity issues in efficiency measurement; see also Cordero et al., 2015; Aiello and Bonanno, 2018, dealing with endogeneity in the banking literature using DEA models to estimate technical efficiency, and D'Inverno et al., 2021, for endogeneity in non‐DEA models).…”

“…Nevertheless, technical efficiency scores in t-1 can be correlated with those computed in year t. The degree of exogeneity of the lagged efficiency scores in t-1 depends on how current performance in t is related to past performance in t-1. Therefore, we perform the robust regression in two stages, similarly to Akpan et al (2020), so that endogeneity effects between efficiency scores and the bank control variable matrix r t are accounted for.…”

“…This two‐stage approach constitutes a methodological cornerstone in banking research on inefficiency (Fukuyama and Matousek, 2011). We complete this using “quasi‐instrumental variables” to address the problem of endogeneity between bank efficiency and its explanatory factors (Orme and Smith, 1996; Bifulco and Bretschneider, 2001; Ruggiero, 2004; Cordero et al., 2015; Aiello and Bonanno, 2018;Akpan et al., 2020; Kweh et al., 2021; Mergoni and De Witte, 2022;).…”

“…2020) as well as lack of adequate distributional assumptions. Additionally, the use of instrumental variables to correct for the possible endogeneity of the variables at stake helps us obtain robust and unbiased estimates on the bank efficiency drivers (see ; Akpan et al., 2020; Mergoni and De Witte, 2022 for a detailed review on endogeneity issues in efficiency measurement; see also Cordero et al., 2015; Aiello and Bonanno, 2018, dealing with endogeneity in the banking literature using DEA models to estimate technical efficiency; see D'Inverno et al., 2021, for endogeneity in non‐DEA models).…”

Potential policy impacts: Establishment of Indonesian mining state-owned holding company

“…Based on value-increasing theory, mergers are carried out in order to produce synergies between companies so as to increase the value of the company. With the efficiency process, if a merger is carried out, value-creation with positive returns are expected to occur for each company (Akpan, Wanke, Chen, & Antunes, 2019;Alexandridis, Antypas, & Travlos, 2017;Banerjee & Eckard, 1998). This is especially seen from the value of Return On Assets (ROA).…”