Overseas Mergers And Acquisitions To Improve The Efficiency Of Chinese Banks?

This paper aims at providing a "big picture" of the evolution and diversification of Chinese banks, and answering whether cross-border M&A enhances their efficiency. Following the opening-up of China's banking industry, the panorama of this area is constituted of the bidirectional M&A activities of foreign banks and Chinese banks. In today's academic world, the extent and depth of researches on foreign banks consolidating domestic banks are prominent, while few works address the issue of M&A in reverse direction. The fact, however, is that upon the end of transition period of WTO accession and confronted by the direct competition of foreign banks, Chinese banks have accelerated their steps in overseas expansion. Thus, it is of great importance to explore the topic as of whether cross-board M&A could benefit Chinese banks in pioneering fresh markets, upgrading technology, improving internal control system, and finally enhancing efficiency and international competency.First, this paper reviews various studies on bank consolidation and bank efficiency to summarize empirical estimates of financial institution efficiency and to outline the advantages and disadvantages of various efficiency methods, which, not surprisingly, do not arrive at consensus view as to whether M&A activities enhance bank efficiency. Based on literature review, this paper further attempts to analyze the characteristics, dynamics, and impacts of bank M&A.Second, this paper examines the efficiency effect of M&A activities by applying stochastic frontier analysis (SFA). This paper summarizes 11 cross-board M&A cases conducted by Chinese banks between 2006 and 2008, involving 6 Chinese financial institutions, and also selects as control group another 9 financial institutions based on "2007 National Ranking of Commercial Banks Competency" by . As the two steps of the empirical study, this paper first estimates the efficiency frontier with SFA, and then establishes the influential factors model for bank efficiency, with M&A as a dummy variable. The test shows: M&A banks experience a statistically significant improvement in profit efficiency as well as in cost efficiency relative to other banks; compared with M&A within the country, cross-board M&A boosts profit efficiency more aggressively, but at the same time gives more downside pressure on cost efficiency; M&A with controlling shares does not cast significant influence over either profit or cost efficiency.The remainder of this paper is organized as follows: Chapter 5 analyzes empirical results, focusing on the effect of M&A motivation and post-M&A integration on efficiency improvement with theoretical analysis and case illustration. Chapter 6 provides suggestions regarding cross-board M&A from the views of commercial banks.