M&A Performance:an Empirical Study On Chinese Commercial Banks Based On SFA And PCA Methods

Since1990s, the fifth M&A wave has begun sweeping the world; financial industry becomes one of the most active industries during this M&A period. There exist few academic studies that focus on the M&A performance of Chinese commercial banks. However, Chinese commercial banks are participating in M&A actively; policymakers need systematic summaries and practicable proposals of Chinese commercial banks’M&A urgently. This paper studies the M&A performance of Chinese commercial banks via empirical analysis method, meanwhile analyzes the motivations and effects of M&A, and investigates the factors influencing M&A performance. Therefore, it has significantly theoretical and practical meanings.M&A motivations and effects are different and as well associated. This paper finds that Chinese commercial banks’M&A motivations are to pursue the market power, economies of scale, diversification of businesses and comprehensive efficiency, and to be interfered by governments. After analyzing M&A motivations, we investigate the M&A effects. Empirical results show that Chinese commercial banks do promote the market power, achieve the effect of scale economy, but do not improve the diversification after participating in M&A activities. The effect of M&A on comprehensive efficiency is multiple and complex.We estimate the X-efficiency of Chinese commercial banks by using Stochastic Frontier Approach and then analyze the influence of bank M&A (from1998to2012) on X-efficiency with the thinking of Difference in Difference method. Empirical results indicate that, in a short-and medium-term (1～3years), M&A have a significantly positive effect on cost efficiency, but a significantly negative effect on profit efficiency; nevertheless, in a long-term, M&A would promote banks’X-efficiency. The action mechanism of positive effects of M&A on cost efficiency is that M&A enhance banks’ asset growth rate, asset-allocating ability and stability. The main reason why M&A have negative effects on profit efficiency in the short-and medium-term is that M&A damage banks’ profitability. Meanwhile, results show that favorable environment for economic growth and easy monetary policy are beneficial to improve the X-efficiency of commercial banks, a high market concentration and the non-state-owned property are beneficial to advance cost efficiency, and expanding banks’ asset scale is a good way to improve their efficiency.Based on accountant study approach, we construct M&A performance indicators in aspects of banks’ profitability, business growth, asset quality, solvency and innovation capability, estimate banks’ performance by using Principal Component Analysis method, and compare banks’ performance before and after M&A. We find that banks’ performance rises first and then goes down after M&A. In a short-term, M&A could promote banks’ performance; in a medium-term, M&A have a significantly negative effect on banks’ performance; in a long-term, the effect is not significant. It is complementary to analyze Chinese commercial banks’ M&A performance by using both stochastic frontier approach and accountant study approach. Results from the two approaches are partially consistent.Finally, we make several recommendations about banks’M&A and efficiency. First, before taking M&A strategy, policymakers had better ponder over the impact of M&A on banks’profit efficiency in the short-and medium-term. They should be cautious to M&A when profit-making capacity of bank is weak. Second, banks’ M&A should be approved in the long run. M&A are good choices for banks whose aim is the long-term growth and cost-intensive development but not the improvement of short-term profitability. Third, to improve the cost efficiency and profit efficiency simultaneously, banks could expand asset size, reduce the ratio of loan to deposit, increase the return on total assets, or enhance the ratio of equity to total asset. Forth, banks’ policymakers should change previous pattern and thinking of M&A if they want to promote business diversification through taking M&A activities. Because previous M&A did not promote banks’business diversification. Pursuing market power and scale economy could be reasons why banks’M&A should be approved. Fifth, in order to enhance Chinese commercial banks’ X-efficiency, regulators could provide a favorable environment for economic growth and easy monetary policy; they could also weaken banks’ state-owned property to promote banks’ cost efficiency.