Mergers decision in Japanese small mutual banks: Efficiency improvement or empire buildings?

Abstract

With the number of bank consolidations increasing around the world since the 1990s, several studies have examined what factors drive banks to consolidate, and some argue that bank managers who have a motive of empire buildings choose mergers. In this study, we deal with mergers among Japanese small mutual banks (credit associations or Shinkin banks) during the period 1996 to 2005. Japanese credit associations have been experiencing an unprecedented wave of consolidation, with their number decreasing from 410 (March 1996) to 292 (April 2006). Interestingly, unlike stock companies, mutual companies are often expected to be weak in terms of disciplining managers. If so, mutual banks tend to choose inefficient mergers at the expense of other stakeholders. Here, we use the stochastic frontier approach (SFA) to obtain "cost efficiency" proxy. We find that while the efficiency of acquiring credit associations decreases during the merger period, mergers do ultimately improve efficiency. Based on our results we find that raising efficiency, not for building empires, is an important goal for such credit association mergers.