An index number approach to measuring bank efficiency: An application to mergers

Abstract The current wave of bank mergers has resulted in an interest in the measurement of consequent efficiencies. Previous studies have generally focused on the measurement of merger-induced cost efficiencies. In this paper, we turn to the production side and examine the change in relative productivity arising from bank mergers. After deriving our superlative multilateral productivity index, we compute the indexes for our entire sample of banks, approximately 2,000 banks in each of the years 1984–1988, and for a cohort of 160 banks that merged in 1986. We find that acquiring banks achieve no gains in efficiency, and this finding supports those of other studies. On the other hand, we find that our acquiring banks are consistently more productive than the sample as a whole. By implication, if mergers can be generally characterized as the acquisition by a relatively more productive bank of a relatively less productive bank, an empirically valid supposition, then industry performance should improve as a result of these mergers.