The Value Effects of Bank Mergers and Acquisitions

The banking industry has experienced an unprecedented level of consolidation on a belief that gains can accrue through expense reduction, increased market power, reduced earnings volatility, and scale and scope economies. A review of the literature suggests that the value gains that are alleged have not been verified. The paper then seeks to address alternative explanations and reconcile the data with continued merger activity.

Will the Adoption of Basel II Encourage Increased Bank Merger Activity? Evidence from the United States

This study presents two tests of the hypothesis that adoption of an internal ratings-based approach to determining minimum capital requirements, proposed as part of the Basel II capital accord, would cause adopting banking organizations to increase their acquisition activity. The study employs U.S. data and focuses on the advanced internal ratings-based approach, as proposed for banking organizations in the United States. The first test estimates the relationship between excess regulatory capital and subsequent merger activity, including organization and time fixed effects, while the second test employs a " difference in difference" analysis of the change in merger activity that occurred the last time U.S. regulatory capital standards were changed. Estimated coefficients and observed differences have signs consistent with the hypothesis, but results are either statistically insignificant or imply differences that are small in magnitude.

Thrift involvement in commercial and industrial lending

How important a role do thrift institutions play in local banking market competition? This article looks at a key aspect of that issue by examining the commercial and industrial lending of commercial banks and thrifts during the 1990s. Generally, thrifts were far less involved in C&I lending than banks during the period, but their involvement varied considerably with such factors as local deposit market concentration and institution size, charter type, and ownership status.Savings and loan associations ; Bank loans

Two essays on financial institutions

The banking industry is unique in that a great deal of firm-level data is publicly available. As regulated entities, banks provide extensive balance sheets and income statements to government agencies. Because these accounting data are collected through identical regulatory forms, the information is comparable across institutions and can be used in cross-sectional analysis. Data on equity returns and market values are also available for those banks that are publicly traded. Combining accounting and market data provides a comprehensive set of information that can be used to conduct research addressing important issues facing the banking industry. This dissertation consists of two papers that accomplish this task. In the first paper, the mean and cross-sectional behavior of performance changes and consolidated abnormal returns is examined among a sample of 48 mergers occurring from 1982 to 1991 involving publicly traded banking institutions. Although both merger-related performance changes and consolidated abnormal returns are small or nonexistent, these measures show a great deal of cross-sectional variation. However, dispersion in performance changes and abnormal returns is related to different factors, suggesting that expectations are based on a different set of variables than those that influence merger outcomes. Further strengthening this notion that expectations and outcomes are unrelated is the insignificance of correlations of abnormal returns with changes in performance measures. In the second paper, pooled cross-sectional and time series analysis is conducted on a sample of 45 large banks from 1991 to 1993 to examine the relationships between the derivatives activity of end-users and dealers and market-based measures of risk and value. While the results are weak in general, they do suggest certain patterns. Dealer activity may be negatively related to risk, while end-user derivatives may be positively related to risk and negatively related to value. The paper also explores issues arising from possible endogeneity, delays in investor acquisition of information, the use of asset-based measures, and the relationship between volatility and value

Two essays on financial institutions

The banking industry is unique in that a great deal of firm-level data is publicly available. As regulated entities, banks provide extensive balance sheets and income statements to government agencies. Because these accounting data are collected through identical regulatory forms, the information is comparable across institutions and can be used in cross-sectional analysis. Data on equity returns and market values are also available for those banks that are publicly traded. Combining accounting and market data provides a comprehensive set of information that can be used to conduct research addressing important issues facing the banking industry. This dissertation consists of two papers that accomplish this task. In the first paper, the mean and cross-sectional behavior of performance changes and consolidated abnormal returns is examined among a sample of 48 mergers occurring from 1982 to 1991 involving publicly traded banking institutions. Although both merger-related performance changes and consolidated abnormal returns are small or nonexistent, these measures show a great deal of cross-sectional variation. However, dispersion in performance changes and abnormal returns is related to different factors, suggesting that expectations are based on a different set of variables than those that influence merger outcomes. Further strengthening this notion that expectations and outcomes are unrelated is the insignificance of correlations of abnormal returns with changes in performance measures. In the second paper, pooled cross-sectional and time series analysis is conducted on a sample of 45 large banks from 1991 to 1993 to examine the relationships between the derivatives activity of end-users and dealers and market-based measures of risk and value. While the results are weak in general, they do suggest certain patterns. Dealer activity may be negatively related to risk, while end-user derivatives may be positively related to risk and negatively related to value. The paper also explores issues arising from possible endogeneity, delays in investor acquisition of information, the use of asset-based measures, and the relationship between volatility and value

What's happened at divested bank offices? An empirical analysis of antitrust divestitures in bank mergers

In their competitive analysis of proposed bank mergers, the Federal Reserve Board, Department of Justice, and other agencies accept branch divestitures as an antitrust remedy in local markets where there is substantial overlap between the acquirer and target. The results of this study, which examines the performance of 751 branches that were divested between June 1989 and June 1998 in conjunction with a merger that raised possible competition issues, suggest that the policy of accepting branch divestitures as an antitrust remedy has been successful. Divested branches operate for lengths of time that are comparable to all branches, and even though they experience substantial deposit runoff around the time of the merger, divested branches subsequently exhibit deposit growth rates that are comparable to those of other similar branches. Cross-sectional analysis does not find any significant relationships between either deposit runoff or subsequent growth and various characteristics of the branch being sold or the firm that purchased it, except for some evidence that post-divestiture growth may increase with the size of the purchaser.Bank mergers

Performance Changes and Shareholder Wealth Creation Associated with Mergers of Publicly Traded Banking Institutions.

This paper examines the mean and cross-sectional behavior of performance changes and consolidated abnormal returns among a sample of forty-eight mergers occurring from 1982 to 1991 involving publicly traded banking institutions. Although both merger-related performance changes and consolidated abnormal returns are small or nonexistent, these measures show a great deal of cross-sectional variation. However, the dispersion in performance changes and abnormal returns is related to different factors suggesting that expectations and outcomes are influenced by different variables. Further strengthening this notion that expectations and outcomes are unrelated are insignificant correlations of abnormal returns and performance changes. Copyright 1996 by Ohio State University Press.

Bank merger activity in the United States, 1994-2003

Mergers and acquisitions have significantly changed the U.S. banking industry over the past quarter century. This study examines patterns in the 3,517 mergers consummated among commercial banks and thrift institutions (savings banks, savings and loan associations, and industrial banks) during the ten years from 1994 to 2003. The data used in this study include the vast majority of consolidation activity that took place during the period and are more detailed and comprehensive than any data available for the years preceding 1994.> About $3.1 trillion in assets,$2.1 trillion in deposits, and 47,300 offices were acquired during the ten-year period. The annual number of mergers was fairly steady between 1994 and 1998 and then declined to a much lower level by 2003. Roughly three-fourths of all deals involved two commercial banking organizations. The remaining mergers involved a thrift institution as the acquirer, the target, or both. The target in the median merger during the period had $102 million in assets,$86 million in deposits, and 3 offices. Mean (average) values are substantially higher because of a relatively small number of extremely large deals: $874 million in assets,$601 million in deposits, and 13 offices.> Whether calculated as a mean or median, roughly 5 percent of the industry's assets, deposits, and offices were acquired in mergers in the typical year in the period. The peak was in 1998. The number of deals completed then (493) was not far larger than the number in earlier years, but the aggregate amounts of assets and deposits purchased in 1998 were roughly twice the second-highest annual levels of the period (recorded in 1996).> Most deals involved the acquisition of a small organization with operations in a fairly limited geographic area. In the aggregate these small mergers tended to account for a relatively small share of the assets, deposits, and offices that were purchased. In contrast, the few acquisitions of very large banks accounted for a large share of the assets, deposits, and offices acquired, and they were responsible for many of the changes to the banking industry caused by consolidation.> Urban markets had disproportionately more mergers than rural markets, and mergers with targets in urban areas accounted for an even larger share of acquired deposits and offices. Urban markets were also more likely than rural markets to be the location of a merger in which the acquirer already had an office in the market.> Acquisitions took place in every state, but the level of activity varied greatly by state. The large majority of mergers involved a target that operated in a single state and an acquirer with at least one office in that state.Bank mergers