Abstract:
This study attempts to investigate the impact of changes in bank
governance on bank performance in Pakistan. Governance changes entail the
privatization and restructuring of state-owned banks, and the merger and
acquisition of private and foreign banks. Using the concept of frontier efficiency,
we adopt an empirical framework that allows us to study the impact of all
governance reform variables in the same model. First, we estimate a stochastic
cost frontier model using unbalanced panel data on commercial banks for the
period 1991–2005. Second, we decompose banks’ total factor productivity (TFP)
change into its different components, using the estimated frontier. In general, the
results show an improvement in banks’ cost efficiency following changes in bank
governance. We note that governance changes bring about an improvement in
banks’ TFP vis-à-vis that of banks that did not undergo governance changes. We
find a declining trend in TFP change (TFPC), which could be a consequence of
the banking industry’s increased profitability. We also note that bank selection
for governance changes has a mixed effect on TFPC, while bank consolidation
seems to be more effective in improving TFPC.
