3-1 - A Comprehensive Analysis of Bank Consolidation...

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A Comprehensive Analysis of Bank Consolidation Values: A Real Option Approach Chuang-Chang Chang, Pei-Fang Hsieh and Hung-Neng Lai * Abstract In this paper, we modify Schwartz and Moon (2000) model to value bank consolidation. From the case study (the first case of Taiwanese bank merge), we find that the consolidation value from the ex-ante viewpoint is average about 30% of the original total values of the associated banks. Further, we find that the probability of bankruptcy after merge will much lower than that of before merge. Hence it is worthwhile to merge for each bank in our case study. We also find that the changes in the growth rate in the integrated loan, the changes in the growth rate in the integrated deposits and the saving factors of cost functions play most important roles in the gratitude of increased consolidation value of bank merge. * Chang, Hsieh and Lai are all with the Department of Finance, National Central University, Taiwan. Corresponding author: Chang, E-mail: ccchang@cc.ncu.edu.tw , Fax: 886-3-4252961. 0
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1. Introduction Despite the growth of domestic financial institutions in the 1990s, the return on equity (ROE) and the return on assets (ROA) of domestic banks in Taiwan have been dramatically declined. This is one of the warnings of an over-banking problem. To solve this problem, the Taiwanese government had passed a Financial Institutions Merger Law in Nov. 2000, allowing banks to acquire other financial institutions or diversify scope of business. For increasing the reformation of financial institutions, the Financial Holding Company Law had been legislated in June 2001, which made the cross-managing and cross-selling through horizontal and vertical integration easier. After the passage of the Law it started a wave of financial institution consolations in Taiwan search for capital efficiency and cost saving. There are numerous papers that discuss about the efficiency effects of bank mergers. One of consolidation efficiency is capital efficiency. Berger, Demestz, and Strahan (1999) review over 250 references and find the evidence is consistent with increases in market power from some types of consolidation through improvement in profit efficiency and diversification of risks. The other is cost saving which comes from eliminating redundant facilities, staff or even department, Rhoades (1998) summarize nine case studies and find that the combined firms achieved their cost cutting objectives in all of the studies. The literatures about consolidation efficiency studies the consequences for individual bank performance of consolidation including event studies of stock price responses, as well as studies of post-merger performance based on income statement and balance sheet information. This is a kind of after-consolidation analysis. There are few paper that explore the merger gain from the ex ante viewpoint. Under a viewpoint of merger, discussing participating banks’ transaction values before a merger plays an 1
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important role. Moreover to evaluate the merger gain in advance is also a key point of a merger decision, as it can tell the decision maker whether to implement the project.
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This note was uploaded on 07/26/2011 for the course ECON 101 taught by Professor Markspenser during the Spring '11 term at Webster FL.

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3-1 - A Comprehensive Analysis of Bank Consolidation...

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