The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia.

The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia.

This paper studies the effect of mergers on the efficiency of commercial banks in Malaysia from 1995-2005. We utilise the non-parametric frontier approach, Data Envelopment Analysis (DEA), to analyse the efficiency of banks during the financial crisis, the merger year, and the pre-and post merger pe...

Full description

Saved in:
Bibliographic Details
Main Author: Muhammad Hafiz, Desa
Format: Thesis
Language:eng
eng
Published: 2007
Subjects:
HG Finance
Online Access:https://etd.uum.edu.my/33/1/muhammad_hafiz.pdf
https://etd.uum.edu.my/33/2/muhammad_hafiz.pdf
Tags: Add Tag
No Tags, Be the first to tag this record!
id my-uum-etd.33
record_format uketd_dc
institution Universiti Utara Malaysia
collection UUM ETD
language eng
eng
topic HG Finance
spellingShingle HG Finance
Muhammad Hafiz, Desa
The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia.
description This paper studies the effect of mergers on the efficiency of commercial banks in Malaysia from 1995-2005. We utilise the non-parametric frontier approach, Data Envelopment Analysis (DEA), to analyse the efficiency of banks during the financial crisis, the merger year, and the pre-and post merger periods. To make comparison of the efficiency of domestic banks, nine foreign banks are also included in the sample. Results show that before financial crisis, foreign banks were more efficient than domestic banks. Surprisingly, domestic banks had a higher efficiency level than foreign banks in the crisis year with an average technical efficiency score of 96.6% compared to 78.9%. It is evidence that 10 domestic banks selected by Bank Negara Malaysia to be the anchor commercial banks were not really affected by financial crisis which hit the country in 1997. However, domestic banks were inefficient during merger year compared to foreign banks. This was due to some of the acquiring banks merged with weaker banks and influenced the bank's performance. Mergers seem to allow efficient banks to gain control of weaker banks, thus helping them to increase input efficiency. The inefficient banks in merger year were also influenced by integrating system and technology in different location and geographical area. We find that efficient banks are not determined by size as small and medium banks are more efficient. The technical efficiency of domestic banks in five years before and five years after the merger were 92.3% and 97.2% respectively. The results also reveal that Malaysian domestic banks experienced an average efficiency of 100% in year 2005. Overall, this study has established that the merger programme in Malaysia was successful.
format Thesis
qualification_name masters
qualification_level Master's degree
author Muhammad Hafiz, Desa
author_facet Muhammad Hafiz, Desa
author_sort Muhammad Hafiz, Desa
title The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia.
title_short The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia.
title_full The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia.
title_fullStr The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia.
title_full_unstemmed The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia.
title_sort effect of mergers on the efficiency of commercial banks: evidence from malaysia.
granting_institution Universiti Utara Malaysia
granting_department College of Business (COB)
publishDate 2007
url https://etd.uum.edu.my/33/1/muhammad_hafiz.pdf
https://etd.uum.edu.my/33/2/muhammad_hafiz.pdf
_version_ 1747826831035203584
spelling my-uum-etd.332013-07-24T12:05:22Z The Effect of Mergers on the Efficiency of Commercial Banks: Evidence From Malaysia. 2007 Muhammad Hafiz, Desa College of Business (COB) Faculty of Finance and Banking HG Finance This paper studies the effect of mergers on the efficiency of commercial banks in Malaysia from 1995-2005. We utilise the non-parametric frontier approach, Data Envelopment Analysis (DEA), to analyse the efficiency of banks during the financial crisis, the merger year, and the pre-and post merger periods. To make comparison of the efficiency of domestic banks, nine foreign banks are also included in the sample. Results show that before financial crisis, foreign banks were more efficient than domestic banks. Surprisingly, domestic banks had a higher efficiency level than foreign banks in the crisis year with an average technical efficiency score of 96.6% compared to 78.9%. It is evidence that 10 domestic banks selected by Bank Negara Malaysia to be the anchor commercial banks were not really affected by financial crisis which hit the country in 1997. However, domestic banks were inefficient during merger year compared to foreign banks. This was due to some of the acquiring banks merged with weaker banks and influenced the bank's performance. Mergers seem to allow efficient banks to gain control of weaker banks, thus helping them to increase input efficiency. The inefficient banks in merger year were also influenced by integrating system and technology in different location and geographical area. We find that efficient banks are not determined by size as small and medium banks are more efficient. The technical efficiency of domestic banks in five years before and five years after the merger were 92.3% and 97.2% respectively. The results also reveal that Malaysian domestic banks experienced an average efficiency of 100% in year 2005. Overall, this study has established that the merger programme in Malaysia was successful. 2007 Thesis https://etd.uum.edu.my/33/ https://etd.uum.edu.my/33/1/muhammad_hafiz.pdf application/pdf eng validuser https://etd.uum.edu.my/33/2/muhammad_hafiz.pdf application/pdf eng public masters masters Universiti Utara Malaysia Akhavein, J. D., Berger, A. N. and Humphrey, D. B., (1997). "The effects of megamergers on efficiency and prices: Evidence from a bank profit function", Review of lndustrial Organization, 12,95-139. Barr, R. S., Killgo, K. A., Siems, T. F. and Zimmel, S., (2002). "Evaluating the productive efficiency and performance of U.S. commercial banks", Managerial Finance, 28(8), 3. Benston, G.J., Hunter, W.C., Wall, L.D.,1995. "Motivations for bank mergers and acquisitions: Enhancing the deposit insurance put option versus earnings diversification", Journal of Money, Credit, and Banking, 27, 777-788. Berger, A. N., and R. DeYoung, (2001). "The effect of geographical expansion on efficiency", Journal of Financial Research Services, 19, 163-184. Berger, A. N., Bonime S., Covitz D., and D. Hancock (2000). "Why are Bank Profits so Persistent? The Roles of Product Market Competition, Informational Opacity, and Regional / Macroeconomic Shocks", Journal of Banking and Finance, 24(7), 1203-1235. Berger, A. N., Demsetz, R.S. and Strahan, P.E.(1999). "The consolidation of the financial services industry: Causes, consequences, and implications for the future", Journal of Banking & Finance, 23, 135-194. Berger, A. N., and Humphrey, D.B., (1997). "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operations Research, 98, 175-212. Berger, A. N., Humphrey, D. B., (1992). "Measurement and efficiency issues in commercial banking. In:Griliches, Z. (Ed.), Output Measurement in the Service Sectors", National Bureau of Economic Research, University of Chicago Press, Chicago, 245-279. Berger, A. N., and Humphrey, D.B., (1992). "Megamergers in banking and the use of cost efficiency as in antitrust defense," Antitrust Bulletin, 37, 541-600. Casu, B. and Girardone, C., (2002). "A Comparative Study of the Cost Efficiency of Italian Bank Conglomerates", Managerial Finance, 28, 3-23. Chamberlain, Sandra L., (1998). "The Effect of Bank Ownership Changes on Subsidiary-Level Earnings." In Bank Mergers & Acquisitions, edited by Yakov Amihud and Geoffrey Miller, Kluwer Academic Publishers. Chames, A., Cooper, W. W., and Rhodes, E.(1978) "Measuring the Efficiency of Decision Making Units", European Journal of Operational Research, 2,429-444. Chen, T. Y. and Yeh, T. L., (1998) "A study of efficiency evaluation in Taiwan's banks," International Journal of Service Industry Management, 9(5), 402- 15. Clark, N. M. and Wheelock, D., (1997). "Why Does Bank Performance Vary Across States?", Review, Federal Reserve Bank of Saint-Louis, 79(2), 27-40. Coelli, T.J., (1996). "A Guide to DEAP Version 2.1: A Data Envelopment Analysis (Computer) Program", Centre for Efficiency and Productivity Analysis (CEPA) Working Paper, 8/96. Cybo-Ottone, A. and Murgia, M., (2000), "Mergers and shareholder wealth in European banking", Journal of Banking and Finance 24,831-59. De Young, R., and Whalen, G. (1994). "Banking industry consolidation: Efficiency issues. Economic & Policy Analysis", Office of the Comptroller of the Currency Working Paper. Dietrich, J. K., and Sorensen, E., (1984). "An application of logit analysis to prediction of merger target," Journal of Business Research, 12,393-402. Drake, L. and Hall, M. J. B., (2003). "Efficiency in Japanese banking: An empirical analysis", Journal of Banking & Finance, 27,891-917. Farrell, M.J., (1957). "The measurement of productive efficiency". Journal of the Royal Statistical Society, Series A (part III), 253-281. Focarelli, D., Panetta, F. and Salle, C., (2002). "Why do Banks Merge?," Journal of Money, Credit and Banking, 34, 1047-1066. Galagedera, D.U.A. and Edirisuriya., (2005). "Performance of Indian commercial banks 1995-2002", South Asian Journal of Management, 12(4), 52. Gunther, J. and Robinson, K., (1999). "Industry Mix and Lending Environment Variability: What Does the Average Bank Face?", Economic and Financial Review, Federal Reserve Bank of Dallas, Q2,24-31. Hadlock, C., Houston, J. and Ryngaert, M., (1999). "The Role of Managerial Incentives in Bank Acquisitions," Journal of Banking and Finance, 23,221-249. Halkos, G. E. and Salamouris, D. S., (2004). "Efficiency measurement of the Greek commercial banks with the use of financial ratios: a data envelopment analysis approach", Management Accounting Research, 15,201-224. Huh, C. and Kim. S., (1994). "Financial Regulation and Banking Sector Performance: A Comparison of Bad Loan Problems in Japan and Korea", Economic Review, Federal Reserve Bank of San Francisco, 0(2), 18-29. Jemric, I. and Vujcic, B., (2002). "Efficiency of Banks in Croatia: A DEA Approach", Working Papers, Croatian National Bank, W- 7 February. Karim, M.Z.A., (2001). "Comparative bank efficiency across select ASEAN countries", ASEAN Economic Bulletin, 18(3), 289-304. Katib, M. N., and Mathews, K. (1999). "A non-parametric approach to efficiency measurement in the Malaysian banking sector," The Singapore Economic Review, 44,89-114. Krishnasamy, G., Ridzwa, A.F. and Vignesan, P.(2004). "Malaysian Post-Merger Banks' Productivity: Application of Malmquist Productivity Index," Managerial Finance, 30, 63-74. Lang, G., and P. Welzel (1999). "Mergers among German Cooperative banks: A Panel-Based Stochastic Frontier Analysis," Small Business Economics, 13, 273-286. Maudos, J, J.M. Pastor, F. Perez and J. Quesada,(2002). "Cost and profit efficiency in European banks", Journal of International Financial Markets, Institutions and Money, 12(1), 33-58. Mahesh H P and Rajeev, M., (2006). "Liberalisation and Productive Efficiency of Indian Commercial Banks: A Stochastic Frontier Analysis", Working Paper, MPRA Paper No.827, http://mpra.ub.uni-muenchen.de/827/ Milbourn, T. T., Boot, A. W.A. and Thakor, A. V.,(1999). "Megamergers and expanded scope: Theories of bank size and activity diversity", Journal of Banking & Finance, 23, 195-214. Miller, S. M. and Noulas, A. G., (1996). "The technical efficiency of large bank production", Journal of Banking & Finance, 20,495-509. Oral, M. and Yolalan, R., (1990). "An empirical study on measuring operating efficiency and Profitability of bank branches," European Journal of Operational Research, 46, 282-294. 0'Keefe, J.P., (1996). "Banking Industry Consolidation: Financial Attributes of Merging Banks," FDIC Banking Review, 9, 18-38. Peek, J. and Rosengren, E. S., (1998). "Bank consolidation and small business lending: It's not just bank size that matters", Journal of Banking & Finance, 22, 799-819. Peristiani, S., (1997). "Do mergers improve the X-efficiency and scale efficiency of U.S. banks? Evidence from the 1980s, Journal of Money, Credit and Banking, 29,326-337. Rhoades, S. A., (1993). "The efficiency effects of horizontal bank mergers", Journal of Banking and Finance, 17, 411-422. Rhoades, S. A., (1998). "The efficiency effects of bank mergers: An overview of case studies of nine mergers", Journal of Banking & Finance, 22,273-291. Rose, P. S., (1995). "The Distribution of Outcomes from Corporate Mergers: Evidence from Commercial Bank Acquisition Strategies", Journal of Accounting, Auditing, and Finance, 10(2), 343-364. Shaffer, S., (1994). "Bank competition in concentrated markets," Federal Reserve Bank of Philadelphia Business Review, Jan-Feb, 3-16. Shanmugam, M., (2000). "The Main Players, Major Banks in The Run for Anchor Status Malaysian Business", Feb 16. Sharma, S. C. and Margono, H., (2004). "Cost efficiency, Economies of Scale, Technological progress and Productivity in Indonesian Banks," Working Paper, Southern Illinois University Carbondale. Sherman, H. D. and Rupert, T. J., (2006). "Do bank mergers have hidden or foregone value? Realized and unrealized operating synergies in one bank merger", European Journal of Operational Research, 168, 253-268. Shih, M.S.H. (2003). "An investigation into the use of mergers as a solution for the Asian banking sector crisis," The Quarterly Review of Economics and Finance, 43, 31-49. Sufian, F., (2004). "The Efficiency Effects Of Bank Mergers And Acquisitions In A Developing Economy: Evidence From Malaysia," International Journal of Applied Econometrics and Quantitative Studies Vo1.1-4, 53-74. Waxman, M., (1998). "A legal framework for systemic bank restructuring," The World Bank Development Research Group and IMF Research Department. Weill, L., (2004). "Measuring Cost Efficiency in European Banking: A Comparison of Frontier Techniques", Journal of Productivity Analysis, 21, 133-152. Book: Timothy J, Coelli, D.S. Pradasa Rao Christopher J. O'Donnell and George E. Battese,(2005). An Introduction to Eficiency and Productivity Analysis (2nd edition),Springer. Website Sources: Bank Negara Malaysia website http://www.bnm.gov.my/ Bursa Malaysia website http://www.bursamalaysia.com.my/ Sultanah Bahiyah Library website, UUM http://www.lib.uum.edu.my/ Institut Bank- Bank Malaysia http://www.ibbm.org.my/ i) Domestic Commercial Banks: Affin Bank http://www.affinbank.com.my/ Alliance Bank http://www.alliancebank.com.my/ AmBank http://www.ambank.com.my/ Bumiputra-Commerce http://www.bcb.com .my/ EON Bank http:www.eonbank.com.my/ Hong Leong Bank Bhd http://www.hlb.com.my/ Malayan Banking Bhd http://www.maybank.com.my/ Public Bank Bhd http://www.publicbank.com.my/ RHB Bank Bhd http://www.rhbbank.com.my/ Southern Bank Bhd http://www.sbbgroup.com.my/ ii) Foreign Commercial Banks: ABN Amm Bank Bhd http://www.abnamromalaysia.com/ Bank Of Tokyo-Mitsubishi UFJ (M) Bhd http://www.bk.mufg.jp/english/malaysia/ Citibank Bhd http://www.citibank.com.my/ Deutsche Bank (M) Bhd http://www.db.com/malaysia/ HSBC Bank (M) Bhd http://www.hsbc.com.my/ OCBC Bank (M) Bhd http://www.ocbc.com.my/ Standard Chartered Bank (M) Bhd http://www.standardchartered.com.my/ The Bank Of Nova Scotia Bhd http://www.scotiabank.com.my/ United Overseas Bank (M) Bhd http://www.uob.com.my/

Similar Items