Question

Abstract: Using the Stochastic Frontier Approach (SFA), this study investigates the cost and profit efficiency effects of bank mergers on the US banking industry. We also use the non‐parametric technique of Data Envelopment Analysis (DEA) to evaluate the production structure of merged and non‐merged banks. The empirical results indicate that mergers have improved the cost and profit efficiencies of banks. Further, evidence shows that merged banks have lower costs than non‐merged banks because they are using the most efficient technology available (technical efficiency) as well as a cost minimizing input mix (allocative efficiency). The results suggest that there is an economic rational for future mergers in the banking industry. Finally, mergers may allow the banking industry to take advantage of the opportunities created by improved technology.

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Answer 1