Are mergers among cooperative banks worth a dime Are mergers among cooperative banks worth a dime? Evidence from post-M&A efficiency in Italy Authored by: Giovanni Ferri, Paoila Covorese, Fabiola Spiniello Discussant : Barry Quinn

Contribution/Approach/Findings Are there efficiency benefits to consolidations (via mergers) in Italian financial cooperatives? They investigate the relationship between the frequency of a financial cooperative’s merger activity and efficiency. Approach They use a two-step approach, measuring cost efficiency using a common stochastic frontier. Tobit/logit regression analysis using merger frequency dummies. Findings More inefficient cooperative are more likely to merge. At least three mergers are required for efficiency improvements.

Methodological Comments Common frontier Failure to appropriately control for group-specific heterogeneity can confound efficiency scores(Bos et al. 2005) Operating environment It has also been shown that failure to model a credit union’s operating environment can bias cost efficiency scores (Glass et al. 2006) Cooperative Objectives Although financial cooperatives try to minimise cost in an effort to maximise the objectives of their owners, cost minimisation is not the objective of these owners (Bauer 2008) Frequency or Time? Why have the authors not consider investigating the temporal nature of efficiency gains in mergers (e.g., Fried et al. 1999)

Second stage regressions McDonald (2009) argued that the use of Tobit regression (censored regression) was considered inappropriate in the second stage. This was because technical efficiency (TE) is fraction data and not generated by a censoring process. There is also a delicate assumption of seperability when considering second stage regressions(e.g. Simar & Wilson 2007,2011)

Results Comments Axioms of production violation?: SFA estimates violate the strictly positive factor price property (coefficient a2) The coefficient estimate on POSTMERGE3 changes sign as a results of different efficiency models This may point to the instability of your specification? An alternative explanation for your findings would be that inefficiency financial cooperatives have a higher probability of being a merger target. Do you differentiate between targets and acquirers in your analysis?

A suggestion An approach which is more in line with the objective function of a financial cooperative is to analyse the return structure of the financial cooperative owners/members (Bauer 2008; Bauer et al. 2009). Financial cooperative’s true objective is to maximise member utility (Smith et al. 1984), preferring higher deposits and lower loan rates. Perhaps this is where Italian financial cooperative mergers are adding value?

Concluding Remarks Thanks for the opportunity to review your paper. Really enjoyed this paper. Very well written and structured. An important and unique contribution to a sparse literature. Potential for other interesting studies with your data.

References Bauer, K.J., Miles, L.L. & Nishikawa, T., 2009. The effect of mergers on credit union performance. Journal of Banking & Finance, 33(12), pp.2267–2274. Bauer, K., 2008. Detecting abnormal credit union performance. Journal of Banking & Finance, 32(4), pp.573–586. Bos, J.W.B. et al., 2005. Inefficient or Just Different? Effects of Heterogeneity on Bank Efficiency Scores. Deutsche Bundesbank Discussion Paper Fried, Harold O. et al. 1999. “The Impact of Mergers on Credit Union Service Provision.” Journal of Banking and Finance 23(2–4): 367–86. Glass, J.C. & McKillop, D.G., 2006. The impact of differing operating environments on US Credit Union Performance, 1993–2001. Applied Financial Economics, 16(17), pp.1285–1300. McDonald, J., 2009. Using least squares and tobit in second stage DEA efficiency analyses. European journal of operational research, 197(2), pp.792–798 Simar, L. & Wilson, P.W., 2011. Two-stage DEA: caveat emptor. Journal of Productivity Analysis, 36(2), p.205. Simar, L. & Wilson, P.W., 2007. Estimation and inference in two-stage, semi-parametric models of production processes. Journal of econometrics, 136(1), pp.31–64.