Consolidation and banks' efficiency in a highly regulated banking market: an event study window analysis approach

Abstract

The study investigates the effects of mergers and acquisitions on Singapore's domestic banking groups' efficiency. A three-year window is chosen to examine the relative overall, pure technical and scale efficiency scores, ex ante and ex post. The non-parametric frontier approach known as Delta Envelopment Analysis (DEA) is employed to measure any efficiency gains (losses) resulting from the mergers and acquisitions among the domestically incorporated banking groups. To guide the definition of inputs and outputs into two alternative models, we used a variant of the intermediation approach. The results from both models suggest that the merger has resulted in higher mean overall efficiency of Singapore banking groups post-merger relative to pre-merger. Although the mergers have resulted in a more efficient Singaporean banking system, we find size to be the biggest factor influencing the inefficiency of Singapore's banking system. Hence, from the scale efficiency perspective, both our models do not support further consolidation in Singapore's banking sector. We do not find evidence of more efficient acquirers compared to the targets, as our findings from both models suggest that the targets are more efficient relative to the acquirers. Our results further support the hypothesis that the acquiring banks' mean overall efficiency improves as a result from a merger with a more efficient bank.

JEL classification: G21, D24