Performance Comparison between Foreign Banks and Domestic Banks for Asian Emerging Markets －Correcting Selection Bias by Matching Methods

Abstract

Based on the banking data of six Asian emerging market countries from 2007 to_x000D_ 2008, this paper analyzes the differences in financial performance between foreign_x000D_ banks and domestic banks. By applying Rubin’s (1973, 1977) matching theory and_x000D_ the propensity score matching of Rosenbaum and Rubin (1983, 1985a, b), four_x000D_ matching methods, namely, the Nearest, Caliper, Mahala and Mahala Caliper, are_x000D_ used to match the financial characteristics of the two groups of banks in order to_x000D_ correct for sample selection bias. The empirical results show that, before sample_x000D_ matching, foreign banks outperform domestic banks in terms of their capital_x000D_ adequacy and underperform them on asset quality. They also do not differ from each_x000D_ other in regard to management ability, earning ability and liquidity risks. After_x000D_ sample matching, most of the evidence suggests that foreign banks exhibit few_x000D_ significant differences from domestic banks based on five CAMEL indicators. The_x000D_ principal outcomes are robust to changes in the definition of foreign banks and to_x000D_ using Heckman’s (1979) two-stage estimation to correct for sample selection bias.