La Dolce Vita in Japan: The Effect of Bank Mergers on Corporate Governance

Abstract

This study examines whether bank mergers change the relationship between market power and efficiency. Using two-stage least-squares instrumental variable estimation to address potential endogeneity between market power and efficiency, we confirm that market power is associated with higher profit efficiency. That analysis is then extended to examine how the relationship between market power and efficiency changes after bank mergers. The results are striking. The relationship between profit efficiency and market power becomes negative after banks merge. This effect is most significant for large and mega bank mergers, which experience significant increases in market power after merger. The increase in market power that accrues due to bank mergers does not lead bank managers to reap potential monopoly profits and boost efficiency. On the contrary, there is evidence that bank managers exploit their higher market power to pursue la dolche vita, or “the sweet life”.