Does the Entry Mode of Foreign Banks Matter for Bank Efficiency? Evidence from Transition Countries

Posted: 14 Aug 2008

See all articles by Dev V. Vencappa

Dev V. Vencappa

Nottingham University Business School

Ngoc Anh Vo Thi

Université Paris X Nanterre

Date Written: July 22, 2008

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.

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

JEL Classification: G21, F36, C01

Suggested Citation

Vencappa, Dev V. and Vo Thi, Ngoc Anh, Does the Entry Mode of Foreign Banks Matter for Bank Efficiency? Evidence from Transition Countries (July 22, 2008). Available at SSRN: https://ssrn.com/abstract=1224702

Dev V. Vencappa

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Ngoc Anh Vo Thi (Contact Author)

Université Paris X Nanterre ( email )

200 avenue de la Republique
Room G301, Building G
Nanterre Cedex, 92001
France

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