A new inverse DEA cost efficiency model for estimating potential merger gains: a case of Canadian banks
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A new inverse DEA cost efficiency model for estimating potential merger gains: a case of Canadian banks Gholam R. Amin1 · Mustapha Ibn Boamah1
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Estimating potential gains from mergers is an important strategic decision-making problem. This paper introduces a new inverse data envelopment analysis (DEA) based on a cost efficiency model for estimating potential gains from mergers. There are restructuring scenarios for firms that want to minimize cost. The existing inverse DEA technical efficiency models are not appropriate for estimating merger gains in these situations. It is also shown that the proposed inverse DEA cost efficiency model can reveal more merger gains than the inverse DEA technical efficiency model. The applicability of the proposed method is shown through an application in Canada’s banking sector to determine the required level of inputs and outputs for a merged bank to achieve target levels of cost and technical efficiencies. The results highlight the potential financial gains to improving both technical and cost efficiencies as efficiency-seeking banks increasingly become large and complex institutions through growth, mergers and acquisitions in a financial environment that is being shaped by reforms and technological innovation. Keywords Data envelopment analysis · Inverse DEA · Merger gains · Cost efficiency · Banking
1 Introduction The banking sector continues to witness consolidation of banks to improve efficiency. The consolidation is mainly due to financial and technological innovations that alters the optimal production functions of banks. The traditional financial intermediation role of banking has been to make long-term loans and fund them by issuing short-term deposits. Financial innovation has created a more competitive environment for the banking industry, changing the industry dramatically, with traditional banking declining and a growth in complex banking institutions through mergers and acquisitions. Mergers and Acquisitions (M&A) may increase market power, economies of scale and the synergies for the combined entities, reducing labor costs, and decrease operating costs by merging bank branches (Hankir et al. 2011). Panetta et al. (2009), argued that the * Gholam R. Amin [email protected] 1
Faculty of Business, University of New Brunswick at Saint John, Saint John, NB E2L 4L5, Canada
13
Vol.:(0123456789)
Annals of Operations Research
activities of a combined entity do not necessarily increase overall performance as reducing monitoring costs could increase credit risk. However, there is growing consensus about the existence of a positive impact of M&As on efficiency and profitability (Hannan and Pilloff 2009; Xiao et al. 2017). Prior studies have used different methods to compare the overall performance of banks before and after M&As including using accounting data (Hagendorff and Keasey 2009), examining the reactions of stocks and bonds to M&As (Knapp et al. 2005), using data envelopment analysis (
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