Does the Entry Mode of Foreign Banks Matter for BankEfficiency? Evidence from the Czech Republic,Hungary, and Poland

This paper investigates the impact of specific modes of entry of foreign banks, i.e.greenfield investment versus merger and acquisition, on bank performance in threetransition economies – the Czech Republic, Hungary, and Poland. We use stochasticfrontier analysis to model and measure the cost efficiency of banks. We adopt amaximum likelihood approach to estimation in which the variance of the one-sided errorterm is modeled jointly with the cost frontier, thus enabling us to retrieve efficiencyscores, as well as estimating the various determinants of X-inefficiency. We first find thatforeign banks are generally more cost efficient than their domestic counterparts, a resultthat confirms those of the existing empirical literature. We then turn our focus tocomparative performance of greenfield banks versus merger and acquisition banks(M&As), and of M&As versus domestic banks. The results show that on average, M&Asare surpassed in terms of efficiency by greenfields banks, but no cost efficiencydifference is apparent between M&As and domestic banks. However, we find a strongage effect with respect to M&As which suggests that the evolution of M&As’ efficiencyfollows an inverse U-shape, that means M&As tend to get more inefficient following theacquisition, but approximately 4 years and a haft later, their efficiency starts to improve....