Efficiency in pre‐merger and post‐merger non‐bank financial institutions

Abstract

A two-part process is employed to analyse the role of efficiency in merger and acquisition (M&A) activity in Australian credit unions during the period 1993 to 1997. The measures of efficiency are derived using the nonparametric technique of data envelopment analysis. The first part uses panel data in the probit model to relate pure technical efficiency, along with other managerial, regulatory and financial factors, to the probability of merger activity, either as an acquiring or acquired entity. The results indicate that loan portfolio diversification, management ability, earnings and asset size are a significant influence on the probability of acquisition, though the primary determinant of being acquired is smaller asset size. The second part uses a tobit model adapted to a panel framework to analyse postmerger efficiency. Mergers appear to have improved both pure technical efficiency and scale efficiency in the credit union industry. During the last two decades, sweeping changes to the restrictions governing deposit-taking institutions (DTI) around the globe have been made. Financial service providers who previously operated within well-defined, regulatory sub-sectors have been forced to adapt to newly deregulated environments. And to some extent, the most discernible response by the financial services industry to the concomitant increase in competition has been an increase in merger and acquisition (M&A) activity. In turn, the wave of M&As has placed an emphasis on the efficiency implications of DTI mergers. Berger et al. (1993, p. 232) justifies the interest of policy-makers and other concerned parties in this process as follows: * Correspondence to: School of Economics and Finance, Queensland University of Technology, GPO Box 2434, Brisbane, QLD 4001, Australia. Tel.: +61 7 3864 2658; fax.: +61 7 3864 1500; email: a.worthington@qut.edu.au 2 If these mergers are successful in improving banking industry efficiency, substantial benefits may accrue to the customers and claimholders of these banks, and the level of competition within the banking industry may be considerably increased. Moreover, the efficiency effect of mergers constitutes an important policy question on its own, since merger applicants often cite prospective efficiency benefits as a justification for merger approval. INTRODUCTIONHowever, when examining existing research in the area of financial institution merger efficiencies, a number of salient points emerge. First, while bank merger efficiencies have been extensively studied, primarily in the context of US financial institutions [see, for instance, Rhoades (1993), Shaffer (1993, Elyasiani et al. (1994) and Grabowski et al. (1995)], relatively little attention has been paid to measuring the post-merger efficiency of non-bank financial institutions or banks outside the US. Berger et al. (1999, p. 180) use these shortcomings to direct future research in this area:Most of the empirical research on financial services consolidation has focused on US banking organisations, and much of this has use...

The effect of mergers on credit union performance

“…8 Fried et al (1999), Garden and Ralston (1999), and Ralston et al (2001). 9 Worthington (2001). 10 For a more extensive discussion of the application of efficiency testing methodologies see Worthington (2008).…”

Impacts of Mergers and Acquisitions on Acquirer Banks’ Performance

“…Similarly some other researchers (Favero & Pepi, 1995;Harris, Ozgen, & Ozcan, 2000;Worthington, 2001;Feroz, Kim, & Raab, 2005;Al-Sharkas et al, 2008;Odeck, 2008;Kwoka & Pollitt, 2010) found higher operating performances in the post merger periods, on the basis of data envelopment analysis (DEA) and stochastic frontier analysis (SFA). However, some studies observe mixed results.…”

“…Some studies (Tarawaneh, 2006;Healy, Palepu, & Ruback, 1992;Lau, Proimos & Weight, 2008;Beena, 2004;Feroz, Kim & Raab, 2005;Harris, Ozen and Ozcan, 2000;Wen, 2002;Al-Sharkas et al, 2008;Odeck, 2008;Worthington, 2001;Kwoka & Pollitt, 2010) observed improvement in the operating performances in the post-merger period. However, other studies (Kumar, 2009;Yeh & Hoshino, 2002;Badreldin & Kalhoefer, 2009;Mantravadi & Reddy, 2008;Cabanda & Pascual, 2007;Pawaskar, 2001;Krishnasamy, Ridzwa & Vignesan, 2004;Rezitis, 2008;Sufian & Fadzlan, 2007) indicate decline or no change in the post-merger performances.…”

Potential cost synergies from banks acquiring real estate brokerage services

“…Pulley and Braunstein (1992) create a composite cost function whose purpose is to examine scope economies and other properties of multi-product firms. Worthington (2001) analyzes the role of efficiency in merger decisions of non-bank financial institutions using Austrian credit unions and finds, ex post, that loan portfolio diversification, management ability, earnings and asset size influence the probability of acquisition. Worthington adds that after the merger, the credit unions' pure technical efficiency and scale efficiency improve.…”