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The purpose of this paper is to examine the impact of merger and acquisition (M&As) of “second financial restructuring” (SFR) on the productivity growth of commercial banks in Taiwan.

The paper uses the Malmquist productivity change index to evaluate the changes from pre-SFR to SFR period and from pre-SFR to post-SFR period. In addition, the bootstrapping regression method is applied to examine the relationship of SFR policy and productivity change.

Merged banks have improved their productivity and scale efficiency after the M&As program of SFR. In addition, the greater productivity growth of merged banks than non-merged banks is attributed to small-sized and private-voluntary merged banks. Furthermore, the small-sized merged banks have greater productivity growth and scale efficiency improvement than the big-sized merged banks, and the government-mandatory merged banks have lower productivity growth than private-voluntary merged banks after the SFR.

This study has an academic implication for providing additional empirical evidence related to the impact of government M&As policy on bank productivity growth in the developing countries.

The findings on this paper have implications for financial reform policy and banking management on M&As activity, in particular, as they clarify the differential effects of big-sized vs small-sized and government-mandatory vs private-voluntary merged banks.

Understanding the impacts of financial reform is particularly important as the banking industry has become increasingly competitive. This paper contributes to this area by assessing the impact of the M&As policy of SFR on productivity growth and evaluating differential effects of M&As.

The aim is to investigate the effects of the first financial restructuring (FFR) on productivity growth, technical progress and efficiency change, using data from 42 commercial banks in Taiwan from 2001 to 2004.

Data envelopment analysis is applied to compute the Malmquist index of productivity change.

It is found that Taiwan commercial banks on average experienced a 117.39 percent increase in productivity growth, of which is 2.11 percent is due to efficiency change and 115.28 percent to technical progress over the four year period. In addition, during the four year period, a 1 percent reduction in the nonperforming loan ratio resulted in 1.85 percent growth in productivity; a 1 percent increase in the capital adequacy ratio led to 2.15 percent growth in productivity.

It can be concluded that after the FFR, the productivity growth, technical progress, and efficiency change all improve, with the lower nonperforming loan ratio contributing to this improved performance.

The study provides evidence of the productivity change of the banking industry in Taiwan in response to the FFR. It also contributes additional empirical evidence on the impact of a reform on bank productivity in a developing country.

The ‘managed stock’ market in Taiwan is neglected by the authorities and general investors. In this paper, we explore the link between financial trait and stock price changes in this special market.

Overall, we analyze and discuss managerial implications for institutional investors, general investors and the authorities as well.