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Does the Entry Mode of Foreign Banks Matter for Bank Efficiency? Evidence from the Czech Republic,Hungary, and Poland

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  • Ngoc-Anh Vo Thi

    ()

  • Dev Vencappa

    ()

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.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp925.

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Length: pages
Date of creation: 01 Jun 2008
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Handle: RePEc:wdi:papers:2008-925

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Keywords: Banking; Transition Economies; Foreign Bank Entry; Greenfield; Mergers and Acquisitions; Stochastic Frontier Analysis; Cost Efficiency.;

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References

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Citations

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Cited by:
  1. Jeon, Bang Nam & Olivero, María Pía & Wu, Ji, 2013. "Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 952-972.
  2. Lehner, Maria, 2009. "Entry mode choice of multinational banks," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1781-1792, October.
  3. Jose L. Gallizo & Jordi Moreno & Ioana Iuliana Pop (Grigorescu), 2011. "Banking Efficiency And European Integration. Implications Of The Banking Reform In Romania," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 25.
  4. Bang Nam Jeon & Maria Pia Olivero & Ji Wu, 2013. "Multinational Banking and Financial Contagion: Evidence from Foreign Bank Subsidiaries," Working Papers 052013, Hong Kong Institute for Monetary Research.

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