Mergers among German cooperative banks: A panel-based stochastic frontier analysis

Based on an unbalanced panel of all Bavarian cooperative banks for the year s of 1989-97, which includes information on 283 mergers, we analyze motives and cost effects of small-scale mergers in German banking. Estimating a fr ontier cost function with a time-variable stochastic efficiency term, we sh ow that positive scale and scope effects from a merger arise only if the me rged unit closes part of the former branch network. When we compare actual mergers to a simulation of hypothetical mergers, size effects of observed m ergers turn out to be slightly more favorable than for all possible mergers . Banks taken over by others are less efficient than the average bank in th e same size class, but exhibit, on average, the same efficiency as the acqu iring firms. For the post-merger phase, our empirical results provide no ev idence for efficiency gains from merging, but point instead to a leveling o ff of differences among the merging units.