The Effects of Acquisition Targets, Diversification and Market Power on Cost Efficiency: Evidence form Taiwanese Banks

Abstract

This study employs a stochastic frontier approach to explore the impacts of acquisition targets, diversification and market power on cost efficiency and compare scale economies, and cost complementarity for 44 banks in Taiwan for the period from 1997 to 2006. The empirical results show that M&As operates with deterioration in the cost efficiency regardless of bank to bank mergers as well as bank to credit union mergers. The higher level of diversification decreases the cost efficiency; however, the banks can improve the cost efficiency when they increase the market power of loans. We also find that the banks operate at economies of scale but the cost complementarity does not exist in the outputs of investment and loans.