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 2008, this paper analyzes the differences in financial performance between foreign banks and domestic banks. By applying Rubin`s (1973, 1977) matching theory and the propensity score matching of Rosenbaum and Rubin (1983, 1985a, b), four matching methods, namely, the Nearest, Caliper, Mahala and Mahala Caliper, are used to match the financial characteristics of the two groups of banks in order to correct for sample selection bias. The empirical results show that, before sample matching, foreign banks outperform domestic banks in terms of their capital adequacy and underperform them on asset quality. They also do not differ from each other in regard to management ability, earning ability and liquidity risks. After sample matching, most of the evidence suggests that foreign banks exhibit few significant differences from domestic banks based on five CAMEL indicators. The principal outcomes are robust to changes in the definition of foreign banks and to using Heckman`s (1979) two-stage estimation to correct for sample selection bias.