Because of the unique corporate governance feature of mutual institutions, managers are expected to maximize their own interests at the expense of other stakeholders' interests. However, this study finds that managers of Japanese mutual banks do not behave as suggested.

Since the 1990s, there have been numerous bank mergers worldwide. Japan is no exception, and many small mutual banks in Japan have been involved in mergers. For example, the number of credit associations in Japan (Shinkin Bank) has decreased from 386 in March 2000 to 298 by April 2005.

The motivation for the merger of credit associations may be different from that of banks, given that credit associations are mutual organizations (Davis, 2001). Mergers have a variety of effects on stakeholders, such as stockholders, bondholders, managers, employees, and customers. Of course, because commercial banks are stock companies, stockholders have the final right to decide whether or not to merge with another bank. Apparently, stockholders do not approve mergers that reduce the value of a firm. In contrast, such value-decreasing mergers may be realized between mutual institutions because the one-member-one-vote principle, which makes the corporate governance of mutual institutions unique, actually gives a great deal of autonomy to the management of mutual institutions. Thus, mergers that would enhance managers' utility but reduce the value of firms could be realized; and by extension, although credit associations and commercial banks provide similar banking services, this difference in corporate governance could be expected to affect the decision of credit association managers to allow an inefficient merger.

Unfortunately, the evidence is limited. Fried et al. (1999) find that although mergers among US credit unions, on an average, have resulted in improved efficiency, roughly half of the acquiring credit unions and roughly 20% of the acquired credit unions have experienced a decline in efficiency after a merger. Similarly, Ralston et al. (2001) investigated Australian credit union mergers and found that though some mergers produced efficiency benefits, an almost equal number of mergers have resulted in a decline of efficiency. Thus, it is premature to conclude that mutual institutions inevitably choose value-decreasing mergers. The present study aims to provide new evidence by focusing on the efficiency effect of mergers of Japanese credit associations.Specifically, this study estimates the cost frontier of each credit association and compares the efficiency levels of mergers with those of non-mergers during the period 1999-2003.

Bank Management Journal, Mutual Institutions, Japanese Credit Associations, Corporate Governance, Japanese Mutual Banks, Mutual Organizations, Commercial Banks, Banking Services, Data Envelopment Analysis, Financial Statements, Management Skills.