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

Ngoc-Anh Vo Thi () and Dev Vencappa

No wp925, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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. (search for similar items in EconPapers)
JEL-codes: C01 F36 G21 (search for similar items in EconPapers)
Pages: pages
Date: 2008-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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