THE IMPACT OF X-EFFICIENCY IN COST REDUCTION IN THE POST-MERGER OF BANKS IN IRAN

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ISAZADEH SAEED; MAZHARI AVA MARYAM

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Journal: JOURNAL OF APPLIED ECONOMICS STUDIES IN IRAN Year:2017 | Volume:6 | Issue:21 Page(s): 173-187

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Title

THE IMPACT OF X-EFFICIENCY IN COST REDUCTION IN THE POST-MERGER OF BANKS IN IRAN

Author(s)

ISAZADEH SAEED | MAZHARI AVA MARYAM | Issue Writer Certificate

Keywords

MERGERQ1

SIMULATIONQ2

X- EFFICIENCYQ1

OMITTING BRANCHESQ1

TRANSLOG COST FUNCTIONQ1

Abstract

In all countries, banks have been played a major role in financing and providing financial services in the economy by granting loans and accepting deposits. Therefore the bank’s efficiency is One of the most important issues in an economy that has to paid much attention. In some cases, MERGERs are common methods to increase the efficiency financial institutions and it is one of the ways of restructuring banking and financial institutions as well. The purpose of this paper is to study of impact of x-efficiency in cost reduction in the post MERGER of banks in Iran. Studies show that economies of scale and x -efficiency are the main reasons for reducing the costs of MERGERs. The studies show that variations in X-efficiency dominate scale, product mix, and branching efficiencies. In this paper Melat Bank and Tejarat Bank with the most assets in between Iranian bank was selected and MERGERs was simulated. We estimate a TRANSLOG COST FUNCTION across the sample, then use this function to simulate MERGERs between pairs of banks by comparing the sum of predicted costs for a given pair of banks with the predicted cost of the merged entity. it is assumed that the hypothetical merged bank is simply the aggregation of the two individual banks thus the total asset and loans are consolidated where input prices are taken as the mean of the input prices for the two individual banks. The x-effeciency is estimated in hypothetical MERGERs by using balance sheet data banks that were merged hypothetically in the periods 1382-1393and by using the TRANSLOG COST FUNCTION and SUR metod, the impact of x-efficiency and OMITTING BRANCHES were studied on reducing costs in banks that were merged hypothetically and was compared changing costs through x -efficiency and OMITTING BRANCHES. Data included: three outputs and three inputs.the output contains a variety of loans to commercial and industrial and other loans, such as loans granted to agriculture, export and services sector and investments, inputs included the price of physical capital and interest paid on deposits, price of labor and average assets. we assumed that the degree of X-inefficiency of the merged banks would equal the asset –weighted mean degree of X-inefficiency of the unmerged banks and the mean residual of the two banks was added to the predicted cost of the combination, and this sum was compared with the sum of actual costs (predicted plus residual) of the two unmerged banks. To distinguish the relative impact of branching, and X-efficiency, these SIMULATIONs were run under alternative assumptions about the number of branches closed following a MERGER therefore was omitted, zero, 10, 20 , 50 and 100% of the smaller bank’s branches. The SIMULATION technique provides a forward-looking picture of what the market could reasonably believe about the potential cost effects of MERGERs, based on ex ante financial information. Such analysis is useful in predicting patterns of MERGERs, to the extent that future consolidation will be influenced largely by cost considerations. The SIMULATION technique can also be applied to a much larger sample than ex post MERGER studies alone; this is important not only for enhancing precision, but also as a way of addressing the concern that many unmerged banks (that may merge in the future) may differ systematically from banks that have recently merged. The results show hypothetical MERGER between the two banks, due X- EFFICIENCY reduced costs but the OMITTING BRANCHES can not reduce the cost of the merged bank, In other words, the MERGER of the two banks, by the x-efficiency reduce costs of the merged bank.

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APA: Copy

ISAZADEH, SAEED, & MAZHARI AVA, MARYAM. (2017). THE IMPACT OF X-EFFICIENCY IN COST REDUCTION IN THE POST-MERGER OF BANKS IN IRAN. JOURNAL OF APPLIED ECONOMICS STUDIES IN IRAN, 6(21 ), 173-187. SID. https://sid.ir/paper/226455/en

Vancouver: Copy

ISAZADEH SAEED, MAZHARI AVA MARYAM. THE IMPACT OF X-EFFICIENCY IN COST REDUCTION IN THE POST-MERGER OF BANKS IN IRAN. JOURNAL OF APPLIED ECONOMICS STUDIES IN IRAN[Internet]. 2017;6(21 ):173-187. Available from: https://sid.ir/paper/226455/en

IEEE: Copy

SAEED ISAZADEH, and MARYAM MAZHARI AVA, “THE IMPACT OF X-EFFICIENCY IN COST REDUCTION IN THE POST-MERGER OF BANKS IN IRAN,” JOURNAL OF APPLIED ECONOMICS STUDIES IN IRAN, vol. 6, no. 21 , pp. 173–187, 2017, [Online]. Available: https://sid.ir/paper/226455/en

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