The Cost Efficiency Effects of Involuntary Bank Mergers: Empirical Evidence from Malaysia
Keywords:
involuntary mergers, efficiency, banking, MalaysiaAbstract
Much of the merger and banking efficiency studies is centered on the market driven or voluntary merger. Thus, the uniqueness of Malaysian merger policy offers an interesting platform for this study to embark on. The merger in Malaysia is unique as all the domestic banks were enforced to merge by the government in year 1999 after years of persuasion with little success. This study attempts to quantify the impact of the involuntary merger on the cost efficiency gains over the 1990-2005 periods. Firstly, several tests have been performed to investigate whether it is best to envelope data with a common frontier of data envelopment analysis (DEA) or by separate frontiers. Secondly, this paper assesses the cost, allocative, technical, pure technical and scale efficiencies of Malaysian banking industry as the results of the merger. In general, the results suggest that the enforcement of the bank merger policy has resulted in an improvement of bank efficiency levels.
References
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9._____________________. 1997. Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research 98: 175–212.
10.Campa, J.M. and I. Hernando. (2006). M&As Performance in the European Financial Industry. Journal of Banking and Finance 30: 3367-3392.
11.Casu, B. & Molyneux, P. 2003. A comparative study of efficiency in European banking. Applied Economics 35: 1865–1876.
12.Cavallo, L. and Rossi, S.P.S. 2001. Scale and scope economies in the European banking systems. Journal of Multinational Financial Management 11: 515–531.
13.Chin, K. F., and Jomo, K. 2001. Financial Liberalisation and System Vulnerability. In Jomo K (ed). Malaysian Eclipse: Economic Crisis and Recovery. New York: Zed Books Ltd. 55-70.
14.Chong, B.S., Liu, M.H. & Tan, K.H. 2006. The Wealth Effect of Forced Bank Mergers and Cronyism. Journal of Banking and Finance 30: 3215-3233.
15.Claessens, S., Djankov, S. & Lang, L.H.P. 2000a. The separation of ownership and control in East Asian corporations. Journal of Financial Economics 58: 81–112.
16.Claessens, S., Djankov, S. & Lixin, C.X. 2000b. Corporate performance in the East Asia financial crisis. The World Bank Research Observer 15 (1): 23–46.
17.Cuesta, R.A. & Orea, L. 2002. Mergers and technical efficiency in Spanish savings banks: A stochastic distance function approach. Journal of Banking and Finance 26: 2231-2247.
18.Darrat, A.F., Topuz, C. & Yousef, T. 2002. Assessing cost and technical efficiency of banks in Kuwait. Working paper ERF’s 8th Annual Conference. Cairo, January 2002.
19.Detragiache, E., & Gupta, P. 2004. Foreign banks in emerging market crises: Evidence from Malaysia. IMF Working Paper WP/04/129. International Monetary Fund.
20.DeYoung, R. 1997. Bank mergers, x-efficiency and the market for corporate control. Managerial Finance 23: 32–47.
21.Dietsch, M. & Lozano-Vivas, A. 2000. How the Environment Determines Banking Efficiency: A Comparison Between French and Spanish Industries. Journal of Banking and Finance 24: 985–1004.
22.Dogan, E. & Fausten, D.K. 2003. Productivity and technical change in Malaysian banking: 1989-1998. Asia Pacific Financial Markets 10: 205-237.
23.Focarelli, D. & Panetta, F. 2002. Are mergers beneficial to consumers? Evidence from the market for bank deposists. Source?
24.Guru, B.K., Avari, M. & Balachandran. 2003. Mergers of Malaysian Banks: Selecting Appropriate Partners. Managerial Finance 30(4): 19-28.
25.Hayami, Y., & V. W. Ruttan. 1970. Agricultural productivity differences among countries. American Economic Review 60: 895-911.
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27.Havrylchyk, O. 2006. Efficiency of the Polish Banking Industry: Foreign versus Domestic Banks. Journal of Banking and Finance 30: 1975–1996.
28.Huizinga, H.P., Nelissen, J.H.M. & Vander Vennet, R. 2001. Efficiency Effects of Bank Mergers and Acquisitions in Europe. Tinbergen Institute Discussion Paper 2001-088/3.
29.Humphrey, D.B. & Vale, B. 2004. Scale economies, bank mergers, and electronic payments: A spline function approach. Journal of Banking and Finance 28:1671–1696.
30.Isik, I. & Hasan, M.K. 2002. Technical, Scale and Allocative Efficiencies of Turkish Banking Industry. Journal of Banking and Finance 26: 719–766.
31.____________________. 2003. Efficiency, ownership and market structure, corporate control and governance in the Turkish banking industry. Journal of Business Finance & Accounting 30(9&10): 1363-1421.
32.Ismail, M. & Abdul Rahim, H. 2009. Impact of merger on efficiency and productivity in Malaysian commercial banks. International Journal of Economics and Finance 1(2): 225-231.
33.Krishnasamy, G., Ridzwan, A.H. & Perumal, V. Malaysian post merger banks’ productivity: Application of Malmquist productivity index. Managerial Finance 30 (4): 63-74.
34.Kumbhakar, S.C., Lozano-Vivas, A., Lovell, C.A.K. & Hasan, I. 2001. The effect of deregulation on the performance of financial institutions: the case of Spanish savings banks. Journal of Money, Credit and Banking 33(1): 101-120.
35.Lang, D. 2002. There are mergers and there are mergers. Higher Education Policy and Management 14 (1): 11-50.
36.Lim, G.H., Randhawa, D.S. & Wee, C.H. 2004. The role of anchor banks and efficiency of bank consolidation: Evidence from Malaysia. Working paper EFMA Annual Meetings, Basel, Switzerland, July 2004
37.Lin, P.W. 2005. An empirical analysis of bank mergers and cost efficiency in Taiwan. Small Business Economics 25: 197-206.
38.Lozano-Vivas, A., Pastor, J.T. & Pastor, J.M. 2002. An efficiency comparison of European banking systems operating under different environmental conditions. Journal of Productivity Analysis 18: 59–77.
39.Matthews, K & Ismail, M. 2006. Efficiency and productivity growth of domestic and foreign commercial banks in Malaysia. Cardiff Business School, WP E2006
40.Mohd. Said, R., Mat Nor, F., Wah, L.W. & Abdul Rahman, A. 2008. Financial performance in mergers and acquisitions of banking institutions: Effects and causes. The Journal of Accounting, Management and Economics Research 6(2): 1-19.
41.Nguyen, S.V. & Lee, SH. 2022. Returns to scale in small and large U.S. manufacturing establishments: Further evidence. Small Business Economics 3: 197-214.
42.Oh, S.N. 1999. Towards a sustainable banking sector—Malaysia. In: Rising to the Challenge in Asia: A Study of Financial Markets: Volume 8—Malaysia. Asian Development Bank 33–78.
43.Okuda, H. & Hashimoto, H. 2004. Estimation cost functions of Malaysian commercial banks: The differential effects of size, location and ownership. Asian Economic Journal 18(3): 233-259.
44.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 28: 294 - 310.
45.Resti, A. 1998. Regulations can foster mergers. Can mergers foster efficiency? The Italian case. Journal of Economics and Business 50:157-169.
46.Rhoades, S.A. 1998. The efficiency effects of bank mergers: An overview of case studies of nine mergers. Journal of Banking and Finance 22: 273 – 291.
47.Sealey, C. & Lindley, J.T. 1977. Inputs, outputs and a theory of production and cost at depository financial institution. Journal of Finance 32: 1251–1266.
48.Serrano-Cinca, C., Molinero, C.M. & Garcia, F.C. 2005. Behind DEA efficiency in financial institutions. Discussion Papers in Accounting & Finance, AF02-7. University of Southampton.
49.Shaffer, S. 1993. A test of competition in Canadian banking. Journal of Money, Credit, and Banking 25(1): 49–61.
50.Shanmugan, B. 2003. Mergers and acquisitions of banks in Malaysia. Managerial Finance 30(4): 1-18.
51.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 1-4: 53-74.
52.Sufian, F. 2005. Sources of Productivity Changes of Commercial Banks in Developing Economy: Evidence from Malaysia, 1998-2003. International Journal of Applied Econometrics and Qualitative Studies 2-3: 125-142.
53.Sufian, F. 2006. The efficiency of non-bank financial institutions: Empirical evidence from Malaysia. International Research Journal of Finance and Economics 6: 49-65.
54.Sufian, F. 2007. Trends in the efficiency of Singapore’s commercial banking groups: A non-stochastic frontier DEA window analysis approach. International Journal of Productivity and Performance Management 56(2): 99-136.
55.Sufian, F. & Abdul Majid, M.Z. 2006. Banks’ efficiency and stock prices in emerging markets: Evidence from Malaysia. Journal of Asia Pacific Business 7(4): 35-53.
56.Sufian, F. & Ibrahim, S. 2005. An Analysis of the Relevance of Off-balance Sheet Items in Explaining Productivity Change in Post Merger Bank Performance: Evidence from Malaysia. Management Research News 28(4): 74-92.
57.Sufian, F. & Habibullah, M.S. 2009. Do mergers and acquisitions leads to a higher technical and scale efficiency? A counter evidence from Malaysia. African Journal of Business Management 3(8): 340-349.
58.Tan, H.B. & Hooy, C.W. 2003. Bank Merger and Bank Stock Volatility: A Post-Announcement Analysis. Managerial Finance, 30(4), 29-47.
59.Worthington, A.C. 2004. Determinants of Mergers and Acquisitions Activity in Australian Cooperative Deposit-taking Institutions. Journal of Business Research 57: 47–52.
60.Zhu J. 2003. Quantitative Models for Performance Evaluation and Benchmarking: Data Envelopment Analysis with Spreadsheets and DEA Excel Solver. International Series in Operations Research & Management Science 51. Boston: Kluwer Academic Publishers.
2.Akhavein, J. D., Berger, A. N. & Humphrey, D.B. 1997. The effects of megamergers on efficiency and prices: Evidence from a bank profit function. Review of Industrial Organization 12: 95-139.
3.Allen, L. & Rai, A. 1996. Operational efficiency in banking: An international comparison. Journal of Banking and Finance 20: 655–672.
4.Amel, D., Barnes, C., Panetta, F. & Salleo, C. 2004. Consolidation and efficiency in the financial sector: A review of the international evidence. Journal of Banking & Finance 28: 2493–2519.
5.BankScope. 2000. Banking database. New York: Bureau Van Dijk IBCA.
6.Batchelor, V., Kuppusamy, K. & Allen, D.E. 2005. The Technological Progress of Malaysian Banks: An Empirical Investigation. School of Accounting, Finance and Economics & FIMARC Working Paper Series, Edith Cowan University, WP 0502.
7.Berger, A. N. 2000. The efficiency effects of bank mergers and acquisition: A preliminary look at the 1990s data. In Amihud, Y. and Miller, G. (eds). Bank Mergers and Acquisitions. Boston: Kluwer Academic Publishers.
8.___________. 2003. The economic effects of technological progress: Evidence from the banking industry. Journal of Money, Credit, and Banking 35 (2): 141 – 176.
Berger, A. N. & Humphrey, D.B. 1992. Megamergers in banking and the use of cost efficiency as an antitrust defense. Antitrust Bulletin 37: 541-600.
9._____________________. 1997. Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research 98: 175–212.
10.Campa, J.M. and I. Hernando. (2006). M&As Performance in the European Financial Industry. Journal of Banking and Finance 30: 3367-3392.
11.Casu, B. & Molyneux, P. 2003. A comparative study of efficiency in European banking. Applied Economics 35: 1865–1876.
12.Cavallo, L. and Rossi, S.P.S. 2001. Scale and scope economies in the European banking systems. Journal of Multinational Financial Management 11: 515–531.
13.Chin, K. F., and Jomo, K. 2001. Financial Liberalisation and System Vulnerability. In Jomo K (ed). Malaysian Eclipse: Economic Crisis and Recovery. New York: Zed Books Ltd. 55-70.
14.Chong, B.S., Liu, M.H. & Tan, K.H. 2006. The Wealth Effect of Forced Bank Mergers and Cronyism. Journal of Banking and Finance 30: 3215-3233.
15.Claessens, S., Djankov, S. & Lang, L.H.P. 2000a. The separation of ownership and control in East Asian corporations. Journal of Financial Economics 58: 81–112.
16.Claessens, S., Djankov, S. & Lixin, C.X. 2000b. Corporate performance in the East Asia financial crisis. The World Bank Research Observer 15 (1): 23–46.
17.Cuesta, R.A. & Orea, L. 2002. Mergers and technical efficiency in Spanish savings banks: A stochastic distance function approach. Journal of Banking and Finance 26: 2231-2247.
18.Darrat, A.F., Topuz, C. & Yousef, T. 2002. Assessing cost and technical efficiency of banks in Kuwait. Working paper ERF’s 8th Annual Conference. Cairo, January 2002.
19.Detragiache, E., & Gupta, P. 2004. Foreign banks in emerging market crises: Evidence from Malaysia. IMF Working Paper WP/04/129. International Monetary Fund.
20.DeYoung, R. 1997. Bank mergers, x-efficiency and the market for corporate control. Managerial Finance 23: 32–47.
21.Dietsch, M. & Lozano-Vivas, A. 2000. How the Environment Determines Banking Efficiency: A Comparison Between French and Spanish Industries. Journal of Banking and Finance 24: 985–1004.
22.Dogan, E. & Fausten, D.K. 2003. Productivity and technical change in Malaysian banking: 1989-1998. Asia Pacific Financial Markets 10: 205-237.
23.Focarelli, D. & Panetta, F. 2002. Are mergers beneficial to consumers? Evidence from the market for bank deposists. Source?
24.Guru, B.K., Avari, M. & Balachandran. 2003. Mergers of Malaysian Banks: Selecting Appropriate Partners. Managerial Finance 30(4): 19-28.
25.Hayami, Y., & V. W. Ruttan. 1970. Agricultural productivity differences among countries. American Economic Review 60: 895-911.
26.Havrylchyk, O. 2004. Consolidation of the Polish Banking Sector: Consequences for the Banking Institutions and the Public. Economic Systems 28: 125–140.
27.Havrylchyk, O. 2006. Efficiency of the Polish Banking Industry: Foreign versus Domestic Banks. Journal of Banking and Finance 30: 1975–1996.
28.Huizinga, H.P., Nelissen, J.H.M. & Vander Vennet, R. 2001. Efficiency Effects of Bank Mergers and Acquisitions in Europe. Tinbergen Institute Discussion Paper 2001-088/3.
29.Humphrey, D.B. & Vale, B. 2004. Scale economies, bank mergers, and electronic payments: A spline function approach. Journal of Banking and Finance 28:1671–1696.
30.Isik, I. & Hasan, M.K. 2002. Technical, Scale and Allocative Efficiencies of Turkish Banking Industry. Journal of Banking and Finance 26: 719–766.
31.____________________. 2003. Efficiency, ownership and market structure, corporate control and governance in the Turkish banking industry. Journal of Business Finance & Accounting 30(9&10): 1363-1421.
32.Ismail, M. & Abdul Rahim, H. 2009. Impact of merger on efficiency and productivity in Malaysian commercial banks. International Journal of Economics and Finance 1(2): 225-231.
33.Krishnasamy, G., Ridzwan, A.H. & Perumal, V. Malaysian post merger banks’ productivity: Application of Malmquist productivity index. Managerial Finance 30 (4): 63-74.
34.Kumbhakar, S.C., Lozano-Vivas, A., Lovell, C.A.K. & Hasan, I. 2001. The effect of deregulation on the performance of financial institutions: the case of Spanish savings banks. Journal of Money, Credit and Banking 33(1): 101-120.
35.Lang, D. 2002. There are mergers and there are mergers. Higher Education Policy and Management 14 (1): 11-50.
36.Lim, G.H., Randhawa, D.S. & Wee, C.H. 2004. The role of anchor banks and efficiency of bank consolidation: Evidence from Malaysia. Working paper EFMA Annual Meetings, Basel, Switzerland, July 2004
37.Lin, P.W. 2005. An empirical analysis of bank mergers and cost efficiency in Taiwan. Small Business Economics 25: 197-206.
38.Lozano-Vivas, A., Pastor, J.T. & Pastor, J.M. 2002. An efficiency comparison of European banking systems operating under different environmental conditions. Journal of Productivity Analysis 18: 59–77.
39.Matthews, K & Ismail, M. 2006. Efficiency and productivity growth of domestic and foreign commercial banks in Malaysia. Cardiff Business School, WP E2006
40.Mohd. Said, R., Mat Nor, F., Wah, L.W. & Abdul Rahman, A. 2008. Financial performance in mergers and acquisitions of banking institutions: Effects and causes. The Journal of Accounting, Management and Economics Research 6(2): 1-19.
41.Nguyen, S.V. & Lee, SH. 2022. Returns to scale in small and large U.S. manufacturing establishments: Further evidence. Small Business Economics 3: 197-214.
42.Oh, S.N. 1999. Towards a sustainable banking sector—Malaysia. In: Rising to the Challenge in Asia: A Study of Financial Markets: Volume 8—Malaysia. Asian Development Bank 33–78.
43.Okuda, H. & Hashimoto, H. 2004. Estimation cost functions of Malaysian commercial banks: The differential effects of size, location and ownership. Asian Economic Journal 18(3): 233-259.
44.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 28: 294 - 310.
45.Resti, A. 1998. Regulations can foster mergers. Can mergers foster efficiency? The Italian case. Journal of Economics and Business 50:157-169.
46.Rhoades, S.A. 1998. The efficiency effects of bank mergers: An overview of case studies of nine mergers. Journal of Banking and Finance 22: 273 – 291.
47.Sealey, C. & Lindley, J.T. 1977. Inputs, outputs and a theory of production and cost at depository financial institution. Journal of Finance 32: 1251–1266.
48.Serrano-Cinca, C., Molinero, C.M. & Garcia, F.C. 2005. Behind DEA efficiency in financial institutions. Discussion Papers in Accounting & Finance, AF02-7. University of Southampton.
49.Shaffer, S. 1993. A test of competition in Canadian banking. Journal of Money, Credit, and Banking 25(1): 49–61.
50.Shanmugan, B. 2003. Mergers and acquisitions of banks in Malaysia. Managerial Finance 30(4): 1-18.
51.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 1-4: 53-74.
52.Sufian, F. 2005. Sources of Productivity Changes of Commercial Banks in Developing Economy: Evidence from Malaysia, 1998-2003. International Journal of Applied Econometrics and Qualitative Studies 2-3: 125-142.
53.Sufian, F. 2006. The efficiency of non-bank financial institutions: Empirical evidence from Malaysia. International Research Journal of Finance and Economics 6: 49-65.
54.Sufian, F. 2007. Trends in the efficiency of Singapore’s commercial banking groups: A non-stochastic frontier DEA window analysis approach. International Journal of Productivity and Performance Management 56(2): 99-136.
55.Sufian, F. & Abdul Majid, M.Z. 2006. Banks’ efficiency and stock prices in emerging markets: Evidence from Malaysia. Journal of Asia Pacific Business 7(4): 35-53.
56.Sufian, F. & Ibrahim, S. 2005. An Analysis of the Relevance of Off-balance Sheet Items in Explaining Productivity Change in Post Merger Bank Performance: Evidence from Malaysia. Management Research News 28(4): 74-92.
57.Sufian, F. & Habibullah, M.S. 2009. Do mergers and acquisitions leads to a higher technical and scale efficiency? A counter evidence from Malaysia. African Journal of Business Management 3(8): 340-349.
58.Tan, H.B. & Hooy, C.W. 2003. Bank Merger and Bank Stock Volatility: A Post-Announcement Analysis. Managerial Finance, 30(4), 29-47.
59.Worthington, A.C. 2004. Determinants of Mergers and Acquisitions Activity in Australian Cooperative Deposit-taking Institutions. Journal of Business Research 57: 47–52.
60.Zhu J. 2003. Quantitative Models for Performance Evaluation and Benchmarking: Data Envelopment Analysis with Spreadsheets and DEA Excel Solver. International Series in Operations Research & Management Science 51. Boston: Kluwer Academic Publishers.
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Published
2012-03-30
How to Cite
Ab-Rahim, R., Md-Nor, N. G., & Ramlee, S. (2012). The Cost Efficiency Effects of Involuntary Bank Mergers: Empirical Evidence from Malaysia. Thailand and The World Economy, 30(1), 129–160. Retrieved from https://so05.tci-thaijo.org/index.php/TER/article/view/136595
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