Does the Entry Mode of Foreign Banks Matter for Bank Efficiency? Evidence from Transition Countries
Year: 2008
Type: preprint
Abstract: This paper investigates the impact of specific modes of entry of foreign banks, i.e. greenfield investment versus merger and acquisition, on bank performance in three transition economies - the Czech Republic, Hungary, and Poland. We use stochastic frontier analysis to model and measure the cost efficiency of banks. We adopt a maximum likelihood approach to estimation in which the variance of the one-sided error term is modeled jointly with the cost frontier, thus enabling us to retrieve efficiency scores, as well as estimating the various determinants of X-inefficiency. We first find that foreign banks are generally more cost efficient than their domestic counterparts, a result that confirms those of the existing empirical literature. We then turn our focus to comparative performance of greenfield banks versus merger and acquisition banks (M&As), and of M&As versus domestic banks. The results show that on average, M&As are surpassed in terms of efficiency by greenfields banks, but no cost efficiency difference is apparent between M&As and domestic banks. However, we find a strong age effect with respect to M&As which suggests that the evolution of M&As' efficiency follows an inverse U-shape, that means M&As tend to get more inefficient following the acquisition, but approximately 4 years and a haft later, their efficiency starts to improve.
Source: SSRN Electronic Journal
Authors: Dev Vencappa, Ngoc Anh Vo Thi
Institutions: University of Nottingham, Université Paris Nanterre
Language: English
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2240995919