Can M&A improve bank performance? A number of studies have explored this question.
Studies on M&A of banks mostly use US and European data, and have produced different answers. Japanese banks have engaged in many M&A activities since 1990. However, very few studies are available about such activities. Therefore, we want to investigate the relation between bank performance and M&A using data from Japan commercial banks during the periods between 1998 and 2008. We use univariate analysis and regression model to find answers.
Results from univariate analysis and two stage regression show that Japanese banks cannot improve profit performance through M&A. These results are consistent with prior studies. However, M&A can help Japanese banks to create cost synergy. This finding is also consistent with previous literature. Furthermore, we run regression analysis to identify short-term and long-term effect on bank M&A. We find that mergers and acquisitions cannot improve Japanese bank profit performance or even make it worse both in short term and in long term. We also find that mergers and acquisitions have short-term cost cutting effect.
Moreover, we have long-term cost reduction effect by expanding bank size through M&A and, thus, achieve economic scale. In addition, smaller banks are generally associated with better performance than larger banks. This negative association is consistent with the results of EU bank efficiency studies.
In conclusion, Japanese banks cannot use M&A to improve performance; however M&A generate create cost synergy. The results of this study also imply that bank performance cannot be improved because M&A cannot expand revenue. Investment income is an important part of revenue for bank; however, Japanese banks invest heavily in real estate and real-estate collateral as security, whose values decrease following the decline in asset prices. Figure 1 shows that land price index substantially decreases from 1992 to 2009. Therefore, Japanese banks experience major losses on investment and, as a result, cannot expand their revenue.
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