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Viverita 372H1:Bank performance increases after mergerBased on the whole Indonesian economic condition during the analysis periods, bankshad less freedom to control the inputs. They were also required to meet some targetslink to loan disbursement (i.e. LDR requirements) in the output side. This is conjunctionwith the decreasing of the government support and the incursion of foreign banks thusraising competition in the market. This implies banks must strengthen their lending toremain competitive. Based on these factors, we choose the output orientation for ouranalysis.3.1. Financial Indicators Measurement of Bank PerformanceSome financial ratios used in this study to evaluate bank performance pre - and postmerger is common. For example, return on asset (ROA), return on equity (ROE), nonperformingloans (NPL), loan to deposit ratio (LDR), capital adequacy ratio (CAR), andnet interest margin (NIM). Return on assets (ROA) is a comprehensive measure ofoverall bank performance from an accounting perspective (Sinkey, Jr., 1992, p. 43). It isa primary indicator of managerial efficiency. It indicates how capable the management ofthe bank has been converting the bank’s assets into net earnings. Indonesian bankingindustry, based on Bank Indonesia’s regulation No.6/23/DPNP May 31, 2004 stated thatthe banks is considered healthy if they have a minimum ROA of 1,215. ROE measuresaccounting profitability from the shareholder’s perspective. It is also illustrate the rate ifreturn flowing to the bank’s shareholders. It approximates the net benefit that thestockholders have received from investing their capital (Rose and Hudgins, 2006, p.151). The Indonesian central bank regulate that the minimum ROE for a healthy bank isthe same as its windows rate at the present time (currently is 8.5%). In addition, capitaladequacy ratio (CAR) indicates the capital strength of a bank. As requested by thecentral bank, banks have to maintain minimum CAR equals to 8%.The central bank’s also regulated that capital funds are consists of capital inclusive ofTier-1 and Tier-2 capital, i.e. core capital and supplementary capital respectively. Tier 1capital consists of paid-up capital and disclosed reserves such as capital reserves andprevious year after tax profit. The Tier-2 capital comprises of reserves from revaluatingthe fixed assets, general reserves, hybrid/quasi capital, and subordinated loans. Thecapital funds equal to 4% of the risk weighted assets (RWA) and other exposures on anongoing basis. Capital funds consist of core capital (Tier-1) and supplementary capital(Tier-2), while for RWA:RWA = (assets x risk weight) + (off balance sheet items/contingent creditexposure x conversion factors)Based on the central bank’s regulation, all advances and loans are classified into twocategories: performing assets/loans and non-performing assets/loans (NPL). NPL is theloans that have overdue in the account and the due interest are not recovered regularly.The maximum NPL allows for a healthy bank is 5%, while net interest margin measureshow large the spread between interest revenues and interest costs that management372

Viverita 373been able to achieve by close control over earning assets and the pursuit of thecheapest sources of funding (Rose and Hudgins, 2006, p. 151). The minimum NIM for ahealthy bank is 4%. Loan-to deposit ratio (LDR) is a traditional measure of bank’sliquidity, indicates the extent to which deposits are used to meet loan request. LDR alsohas important role for the banks which is as an indicator for banks as an intermediaryinstitution to connect the excess funding holders and the users in their economicactivities. Therefore, the optimum level should be maintained, so that the necessaryliquidity needed and their function as an intermediary should be fulfilled. Total loandefines as the sum of the performing loans, non-performing loans, and deducted byallowances (provision for possible losses). Recently, the minimum LDR for commercialbanks is increase to the level of 68%, while the maximum LDR is 94, 75 %.3.2.1 Malmquist Data Envelopment AnalysisUsing the DEA methodology, one can calculate the relative efficiency of banks, whichcan be advantage the need for assigning a priori measures of relative importance of toany inputs or outputs. Therefore, one can define efficiency as full efficiency when noneof its inputs or outputs can be improved without deteriorating some of its other inputs oroutputs. In addition, a bank can be considered as 100% efficient if the performance ofother banks cannot be improved without worsening some of its other inputs or outputs.DEA is used as a tool to evaluate operating performance of such a DMU or anorganization. The performance is simply measured as unit (DMU) efficiency orproductivity, which is a ratio of output produced to input used in the productionprocesses. For example, partially we can measure labor efficiency as sales per numberof employee. In addition, we can also measure total productivity by incorporating allpossible inputs used to produce all possible outputs of such entity.According to Boussofiane et al. in Martin and Parker (1997; 127), DEA is a nonparametric″…linear programming method used for evaluating the efficiency of decisionmakingunits (DMUs or firms), where the presence of incommensurate inputs andoutputs makes the measurement of overall efficiency difficult”. It uses data as inputs andoutput quantities of a group of firms to construct a piece-wise frontier over the datapoints. This frontier is constructed by the solution of a sequence of linear programmingproblems, one for each firm in the sample. Efficiency measures are then calculatedrelative to this frontier, which represents an efficient technology. Hence, this method isan ideal measure for broad measurement of efficiency. Moreover, it ″allows efficiency tobe measured without having to specify either the form of production function or theweights for inputs and outputs used”. 1 Charnes et al. (1978) first used the DEA constant.It takes into account multiple inputs that are used in the production process to produceoutputs, to calculate total factor productivity. Total factor productivity (TFP) index is theratio of the weighted aggregate output to a weighted aggregate input quantity index. Thisstudy is design to apply DEA-Malmquist productivity index to measure a firm’s TFP.1 DEA is a generalized of TFP methods and non-parametric because its flexibility. That is, the nature of thefunctional form between outputs and inputs is not specified in advance (Boussofiane et al. in Martin andParker (1997)).373

the Glorious Revolution of 1688, declined and lost most of its political clout(Nef, 1957, pp. 26 and 32). With Parliamentary supremacy established overthe Crown, legislation was passed in 1769 making the destruction of machinerypunishable by death (Mokyr, 1990, p. 257). To be sure, there was still resistanceto mechanisation. The “Luddite” riots between 1811 and 1816 were partly amanifestation of the fear of technological change among workers as Parliamentrevoked a 1551 law prohibiting the use of gig mills in the wool-finishing trade.The British government however took an increasingly stern view on groupsattempting to halt technological progress and deployed 12,000 men against therioters (Mantoux, 2006, p. 403-8). The sentiment of the government towardsthe destruction of machinery was explained by a resolution passed after theLancashire riots of 1779, stating that: “The sole cause of great riots was thenew machines employed in cotton manufacture; the country notwithstandinghas greatly benefited from their erection [and] destroying them in this countrywould only be the means of transferring them to another [. . . ] to the detrimentof the trade of Britain” (cited in Mantoux, 2006, p. 403).There are at least two possible explanations for the shift in attitudes towardstechnological progress. First, after Parliamentary supremacy was establishedover the Crown, the property owning classes became politically dominant inBritain (North and Weingast, 1989). Because the diffusion of various manufacturingtechnologies did not impose a risk to the value of their assets, and someproperty owners stood to benefit from the export of manufactured goods, theartisans simply did not have the political power to repress them. Second, inventors,consumers and unskilled factory workers largely benefited from mechanisation(Mokyr, 1990, p. 256 and 258). It has even been argued that, despitethe employment concerns over mechanisation, unskilled workers have been thegreatest beneficiaries of the Industrial Revolution (Clark, 2008). 7 While there7 Various estimations of the living standards of workers in Britain during the industrialisationexist in the literature. For example, Clark (2008) finds that real wages over the period 1760 to1860 rose faster than GDP per capita. Further evidence provided by Lindert and Williamson(1983) even suggests that real wages nearly doubled between 1820 and 1850. Feinstein (1998),on the other hand, finds a much more moderate increase, with average working-class livingstandards improving by less than 15 percent between 1770 and 1870. Finally, Allen (2009a)finds that over the first half of the nineteenth century, the real wage stagnated while output perworker expanded. After the mid nineteenth century, however, real wages began to grow in linewith productivity. While this implies that capital owners were the greatest beneficiaries of theIndustrial Revolution, there is at the same time consensus that average living standards largelyimproved.7

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