Linking Bank Efficiency and Share Price Performance: Evidence from the Singaporean Banking Industry

Abstract

Abstract : The non-parametric frontier approach, Data Envelopment Analysis (DEA) with a variant of the intermediation approach to two models, was employed to detect for any efficiency gains (loss) resulting from the mergers and acquisitions together with a threeyear event window among the domestic incorporated Singapore banking groups. The results from both models suggest that the mergers have resulted in higher mean overall efficiency of Singapore banks post-merger relative to pre-merger. Although mergers have resulted in a more efficient Singapore banking system, we found that size has become the biggest factor resulting in the inefficiency of the Singapore banking system. Henceforth, size will not support further consolidation in the Singapore banking sector. The results also support the hypothesis that the acquiring banks' efficiency improved (deteriorated) post-merger resulting from the merger with a more (less) efficient bank. We have further established the relationship between cost efficiency and share price performance by employing panel regression analysis. The evidence seems to indicate that the excess market returns tend to reflect stock performance rather than changes in cost efficiency.