oAcquisitions in both types ofefficiencies after the acquisitions.Acquisitions and

oAcquisitions and Cost EfficiencyFreiet al.

(1996) concluded that the cost efficiency effects of acquisitions depend on the type ofacquisition and the motives behind this activity and the mode used by the management toimplement its strategy. De Young (1997) conducted a study and found that 58% out of a sampleof 348 acquisitions in the period from 1987 and 1989 generated little cost efficiencies. Thefindings of De Young (1997) point out that acquisition of banks of same size capture lesser thanaverage cost efficiencies.

Huizinga et al (2001) conducted a study by taking a sample of 52horizontal acquisitions of European banks taking place during the time span of 1994-1998 usingStochastic Frontier Analysis and showed positive impact on cost efficiency but the advancementin profit efficiency was only minor.Wen (2002) recognized important advancement in technical and allocative efficiency andunimportant cost efficiency advancement after bank acquisitions in Taiwan using DEA.Worthington (2001) calculated the difference between pre-acquisition and post-acquisitionefficiency of the non-financial institutions. He used the discrete choice regression model and hisresults revealed that there was significant improvement in efficiency of Australian credit unionsafter the acquisitions during the time period of 1993-95.

Halkos and Salamouris (2004) used aDEA model without using inputs to examine the effect of acquisitions on the efficiency levels ofbanks. They observed that acquisitions that involved large banks increased the efficiency levelsof banks. Sufian & Fadzlan (2004) used the non-parametric frontier strategy of DataEnvelopment Analysis (DEA) to explore the technical and scale efficiency of domesticintegrated Malaysian commercial banks during the period of 1998 to 2003.

Their findingsshowed improvement in efficiency in the post acquisitions period.IMPACT OF ACQUISITION ON COST AND PROFIT EFFICIENCY OF NON-FINANCIAL FIRMSoGourlay et al (2006) observed efficiency gains from bank acquisitions in India by using thetechnique of Data envelopment Analysis. Cummins and Xie (2006) found considerable positiveabnormal returns for both the target and acquirer firms by using the event study method toobserve the effects of acquisitions on publicly traded property-liability insurers. Though, mosttakeover targets in the property-liability insurance industry are not publicly traded, the DEAtechnique used in his paper added value by studying both traded and non-traded firms. Al-Sharkas et al. (2008) used the techniques of Stochastic Frontier Analysis (SFA) and DataEnvelopment Analysis (DEA) to inspect the effect of acquisitions on cost and profit efficiency ofthe US banking sector. Their results suggest the confirmation of enhancement in both types ofefficiencies after the acquisitions.

Acquisitions and Profit EfficiencyThe intellectual literature has made little development in determining the basic source ofprofitability gains related with bank acquisitions. Regardless of the advantages of the profitefficiency over cost efficiency, there are few studies in banking or any other industry about theefficiency effects of acquisitions. Many researchers have studied changes in profitability ratiosdue to acquisitions but these studies cannot determine the level of increase in profitability whichis due to an improvement in profit efficiency.

Cybo-Ottone and Murgia (2000) conducted a study taking a sample of 54 large deals takingplace in a period of 1988-1997 in Europe. He concluded that performance of the bidder andtarget is very important at the announcement date. The result showed a great deal of variationcross-sectionally, the abnormal returns related with the domestic bank to bank deals on averagewere significantly positive. There are a number of studies which contrast bank profitability ratiosbefore and after acquisitions with those peer banks that did not undergo acquisitions. SomeIMPACT OF ACQUISITION ON COST AND PROFIT EFFICIENCY OF NON-FINANCIAL FIRMSostudies found enhanced profitability ratios related with acquisitions (Cornett and Tehranian,1992) but others found no significant improvement (Piloff, 1996; Akhavein et al, 1997).Vander Vennet (1996) used cost and profit ratios to scrutinize the performance effects oftakeovers in a sample of 492 European banks over a period of 1988-1993. Domestic acquisitionsof equal-sized banks were found to improve the profitability of acquirer banks. Domestictakeovers resulted in the lack of performance improvements just after the acquisition while thetarget banks showed inferior performance measures just before the takeover.

The problem whileinferring conclusion from profitability ratios is that they include both changes in market powerand operational efficiency, which cannot be altered without controlling efficiency. This problemcan be overcome by investigating the profit efficiency effect of acquisitions. Akhavein et al(1997) and Berger (1998) found that US bank acquisitions taking place between 1980s and early1990s enhanced profit efficiency.

This improvement was due to the enhanced diversification ofrisks of acquisition banks.