La Dolce Vita in Japan: The Effect of Bank Mergers on Corporate Governance

Heather Montgomery,Yuki Takahashi

doi:10.5430/ijfr.v7n1p57

Abstract

This study examines whether bank mergers change the relationship between market power and efficiency. Using two-stage least-squares instrumental variable estimation to address potential endogeneity between market power and efficiency, we confirm that market power is associated with higher profit efficiency. That analysis is then extended to examine how the relationship between market power and efficiency changes after bank mergers. The results are striking. The relationship between profit efficiency and market power becomes negative after banks merge. This effect is most significant for large and mega bank mergers, which experience significant increases in market power after merger. The increase in market power that accrues due to bank mergers does not lead bank managers to reap potential monopoly profits and boost efficiency. On the contrary, there is evidence that bank managers exploit their higher market power to pursue la dolche vita, or “the sweet life”.

Highlights

On the day that Japan’s Dai-Ichi Kangyo Bank (DKB), Fuji Bank and Industrial Bank of Japan (IBJ) merged into one of the world’s largest banks, the new Mizuho Bank’s ATMs stopped working due to a computer system failure, leaving depositors unable to withdraw money (Nihon Keizai Shimbun, 2002)
This section discusses the results of our empirical analysis of (i) whether bank mergers increase market power (ii) whether increased market power is associated with higher or lower bank efficiency and (iii) whether merger events significantly change the relationship between market power and efficiency
3.2 Does Increased Market Power Reduce Efficiency? we examine the effect of market power on efficiency

Summary

Introduction

On the day that Japan’s Dai-Ichi Kangyo Bank (DKB), Fuji Bank and Industrial Bank of Japan (IBJ) merged into one of the world’s largest banks, the new Mizuho Bank’s ATMs stopped working due to a computer system failure, leaving depositors unable to withdraw money (Nihon Keizai Shimbun, 2002). Ito (2001), for example, argues that this practice has prevented merged banks from realizing potential merger gains. Those concerns are backed up by other studies in Japan which find that commercial bank mergers tend to reduce cost efficiency – where we might expect to find the most value created – and have no significant impact on the bottom line of profit efficiency (Note 1). The existing literature still leaves open the question of how banking sector consolidation affects efficiency, including the channel of market power. We examine how bank mergers affect the relationship between market power and efficiency

Methods

Results

Conclusion