Capital regulation-induced mergers and acquisitions: do they improve or impede cost efficiency?

This study analyzes the impact of capital regulation-induced mergers and acquisitions (M&As) on the cost efficiency of Nepali commercial banks. This research question is worthy of attention as the regulatory policy of quadrupling paid-up capital within an acute deadline of two years is a case unique to Nepal. Using stochastic frontier analysis on a monthly panel data set (2013 to 2023), we estimate the time-varying efficiency scores and subsequently assess the impact of M&As through the difference-in-differences method. The results show that post-merger efficiency declined for banks merged between 2015 and 2017, with robustness checks confirming the consistency of this finding. The two-year deadline to meet the quadrupled paid-up capital requirement forced rushed Mergers and Acquisitions, impeding efficiency. Interestingly, the same banks that merged again after 2017/18 saw improved efficiency, suggesting strategic planning and timing matter for observing gains in operating efficiency. These insights contribute to both academic debates and policy considerations on financial sector reforms in frontier economies. Our findings offer a cautionary note for regulators that excessive stringency may lead to unintended negative consequences.