The Impact of Forced Mergers and Acquisitions on Bank Cost Efficiency: Empirical Evidence From Malaysia

The present paper examines the impact of forced mergers and acquisitions on the cost efficiency of the Malaysian banking sector. The analysis consists of three stages. Firstly, by using the Data Envelopment Analysis (DEA) approach, we calculate the cost, allocative, and technical efficiency of individual banks during the period 1997-2003. Secondly, we examine changes in the efficiency of the Malaysian banking sector during the pre and post merger periods by using a series of parametric and non-parametric univariate tests. Finally, we employ the multivariate Tobit regression analysis to examine factors that influence the efficiency of the Malaysian banking sector during the pre and post merger periods. The empirical findings suggest that the merger has resulted in a higher mean cost efficiency of the Malaysian banking sector post merger. We find that the acquirers have been relatively more cost efficient in all of the seven merger cases analyzed. The results from the multivariate regression analysis suggest that loans intensity, size, income diversification, and capitalization exhibits positive relationship with bank efficiency. On the other hand, market share and expense preference behaviour are negatively related to bank efficiency levels. The empirical findings suggest that banks in the control group have been relatively more cost efficient than those that were involved in mergers. The results suggest that the variations in Malaysian bank cost efficiency are not significantly related to economic conditions and concentration.