The success of bank mergers revisited. An assessment based on a matching strategy

The question of whether or not mergers and acquisitions have helped to enhance banks' efficiency and profitability has not yet been conclusively resolved in the literature. We argue that this is partly due to severe methodological problems involved. In this study we analyze the effect of German bank mergers from the period 1995-2000 on the banks' profitability and cost efficiency. We suggest a new matching strategy to control for the selection effects arising from the fact that pre-dominantly under-performing banks engage in mergers. Our results indicate a neutral effect of mergers on profitability and cost efficiency. Comparing our results with those obtained from a naive performance comparison of merging and non-merging banks indicates a severe negative selection bias with regard to the latter.