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

This paper examines two important issues related to bank mergers in India. First, we estimate potential economic gains of state owned banks if they undergo consolidation. Scale economies, returns to scale and profit efficiency of state owned banks during 1986 to 2003 are estimated based on stochastic frontier analysis. We find that many Indian banks exhibit potential cost savings from mergers provided they rationalize their branch networks although profit efficiency may not rise immediately. Second we measure the realized 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.