Inherited or earned? Performance of foreign banks in Central and Eastern Europe

In this study, using a combination of propensity score matching and difference-in-difference techniques, we investigate the impact of foreign bank ownership on the performance and market power of acquired banks operating in Central and Eastern Europe. This approach allows us to control for a selection bias as larger but less profitable banks were more likely to be acquired by foreign investors. We show that during 3 years after takeover, banks become more profitable owing to cost minimization and better risk management. They also gained market share due to passing their lower cost of funds to borrowers in terms of lower lending rates. Previous studies failed to note the improvements in the performance of takeover banks because they did not account for the selection bias. (C) 2010 Elsevier B.V. All rights reserved.