Estimation of potential gains from bank mergers

a novel two-stage cost efficiency DEA model

Xiao Shi, Yongjun Li, Ali Emrouznejad, Jianhui Xie, Liang Liang

Research output: Contribution to journalArticle

Abstract

This paper develops a novel two-stage cost efficiency model to estimate and decompose the potential gains from Mergers and Acquisitions (M&As). In this model, a merged DMU is defined as a combination of two or more candidate DMUs. The merged DMU would surpass the traditional Production Possibility Set (PPS). In order to solve the problem, a Merger Production Possibility Set (PPSM) is constructed. The model minimizes the total cost of the merged DMU while maintaining its outputs at the current level, estimates the overall merger efficiency by comparing its minimal total cost with its actual cost. Moreover, the overall merger efficiency could be decomposed into technical efficiency, harmony efficiency and scale efficiency. We show that the model can be extended to a two-stage structure and these efficiencies can be decomposed to both sub-systems. To show the usefulness of the proposed approach, we applied it to a real dataset of top 20 most competitive Chinese City Commercial Banks (CCBs). We concluded that (1) There exist considerably potential gains for the proposed merged banks. (2) It is also shown that the main impact on potential merger gains are from technical and harmony efficiency. (3) As an interesting result we found that the scale effect works against the merger, indicating that it is not favorable for a full-scale merger.
Original languageEnglish
Pages (from-to)1045-1055
Number of pages11
JournalJournal of the Operational Research Society
Volume68
Issue number9
Early online date23 Feb 2017
DOIs
Publication statusPublished - 21 Dec 2017

Fingerprint

Costs
Mergers and acquisitions
Mergers
DEA model
Bank mergers
Harmony
Technical efficiency
Stage structure
Scale efficiency
Usefulness
Scale effect
Commercial banks
Subsystem

Bibliographical note

This article is distributed under the terms of the Creative Commons Attribution 4.0 International Licence (http://creativecommons.org/licences/by/4.0), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the creative Commons license, and indicate if changes were made.

Keywords

  • DEA
  • mergers and acquisitions
  • potential cost saving
  • two-stage network

Cite this

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abstract = "This paper develops a novel two-stage cost efficiency model to estimate and decompose the potential gains from Mergers and Acquisitions (M&As). In this model, a merged DMU is defined as a combination of two or more candidate DMUs. The merged DMU would surpass the traditional Production Possibility Set (PPS). In order to solve the problem, a Merger Production Possibility Set (PPSM) is constructed. The model minimizes the total cost of the merged DMU while maintaining its outputs at the current level, estimates the overall merger efficiency by comparing its minimal total cost with its actual cost. Moreover, the overall merger efficiency could be decomposed into technical efficiency, harmony efficiency and scale efficiency. We show that the model can be extended to a two-stage structure and these efficiencies can be decomposed to both sub-systems. To show the usefulness of the proposed approach, we applied it to a real dataset of top 20 most competitive Chinese City Commercial Banks (CCBs). We concluded that (1) There exist considerably potential gains for the proposed merged banks. (2) It is also shown that the main impact on potential merger gains are from technical and harmony efficiency. (3) As an interesting result we found that the scale effect works against the merger, indicating that it is not favorable for a full-scale merger.",
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Estimation of potential gains from bank mergers : a novel two-stage cost efficiency DEA model. / Shi, Xiao; Li, Yongjun; Emrouznejad, Ali; Xie, Jianhui; Liang, Liang.

In: Journal of the Operational Research Society, Vol. 68, No. 9, 21.12.2017, p. 1045-1055 .

Research output: Contribution to journalArticle

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AU - Shi, Xiao

AU - Li, Yongjun

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AU - Xie, Jianhui

AU - Liang, Liang

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N2 - This paper develops a novel two-stage cost efficiency model to estimate and decompose the potential gains from Mergers and Acquisitions (M&As). In this model, a merged DMU is defined as a combination of two or more candidate DMUs. The merged DMU would surpass the traditional Production Possibility Set (PPS). In order to solve the problem, a Merger Production Possibility Set (PPSM) is constructed. The model minimizes the total cost of the merged DMU while maintaining its outputs at the current level, estimates the overall merger efficiency by comparing its minimal total cost with its actual cost. Moreover, the overall merger efficiency could be decomposed into technical efficiency, harmony efficiency and scale efficiency. We show that the model can be extended to a two-stage structure and these efficiencies can be decomposed to both sub-systems. To show the usefulness of the proposed approach, we applied it to a real dataset of top 20 most competitive Chinese City Commercial Banks (CCBs). We concluded that (1) There exist considerably potential gains for the proposed merged banks. (2) It is also shown that the main impact on potential merger gains are from technical and harmony efficiency. (3) As an interesting result we found that the scale effect works against the merger, indicating that it is not favorable for a full-scale merger.

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