Directional distance function DEA estimators for evaluating efficiency gains from possible mergers and acquisitions

Abstract

A modified generalised directional distance function data envelopment analysis model is introduced into the smoothed bootstrap context. The new model handles asymmetrically desirable and undesirable outputs and deals with positive and negative values, while the bias-corrected estimators are independent of the length of the direction vector. The reason for the development of this new efficiency assessment model is the estimation of the degree of operating efficiency gains from possible mergers and acquisitions (M&A) between banks. Our estimations are regarded as more realistic compared to those found in the extant literature, as they consider not only desirable but also undesirable variables and negative values that are crucial to the evaluation of firm performance. The new model is not only applicable to the banking sector but also in any industry. We use two data samples, one consisting of 86 conventional and a second consisting of 21 Islamic banks. Among the findings of this study is the convergence of the conventional and Islamic banks’ efficiencies over the period 2014–2016. Moreover, consolidations only between efficient and inefficient conventional banks lead to higher operating efficiency, while M&A between efficient only or inefficient only conventional banks and between Islamic banks are likely to be undesirable.

Keywords:

• Banking
• bank mergers
• efficiency
• data envelopment analysis
• bootstrap

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The Middle East and North Africa (MENA) region includes the following countries: Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, and Yemen (World Bank, 2020). The MENA region countries represented in this study are eleven (i.e. Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, and United Arab Emirates), limited by the availability of banking sector data in the BankFocus database.

2 The Gulf Cooperation Council (GCC) member states are: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

3 Considering the Qatar diplomatic crisis, banks from Bahrain, Egypt, Saudi Arabia and United Arab Emirates have not been taken into account for the calculation of the mean DOEG as these countries have banned Qatari companies from doing any business in their territory.

Additional information

Funding

This research is financed by the University of Sharjah (Research Project No. 1903030419).