Title: Efficiency, scale economies and valuation effects: evidence from bank mergers in India

Authors: Rudra Sensarma, M. Jayadev

Addresses: Department of Accounting, Finance & Economics, University of Hertfordshire Business School, Hatfield, Hertfordshire AL10 9AB, UK. ' Finance and Control Area, Indian Institute of Management, Bennarghatta Road, Bangalore 560 076, India

Abstract: This paper examines two important issues related to bank mergers in India. First, we estimate potential economic gains of state-owned banks from consolidation. Scale economies, returns to scale and profit efficiency of state-owned banks during 1986 to 2007 are estimated based on stochastic frontier analysis. We find that many Indian banks exhibit potential cost savings from mergers, provided they rationalise their branch networks although profit efficiency may not rise immediately. Second, we measure the realised impact of bank mergers on shareholders| wealth based on event study analysis. We find that in the case of forced mergers, shareholders of neither the bidder nor the target banks benefited. In the case of voluntary mergers, the bidder banks| shareholders gained more than the target banks| shareholders.

Keywords: bank mergers; bank acquisitions; efficiency; scale economies; stochastic frontier analysis; SFA; event study; abnormal returns; India; economic gains; state-owned banks; bank consolidation; returns to scale; profit efficiency; cost savings; banking industry.

DOI: 10.1504/IJFSM.2010.035683

International Journal of Financial Services Management, 2010 Vol.4 No.4, pp.311 - 337

Published online: 02 Oct 2010 *

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