Stockholder gains from focusing versus diversifying bank mergers

Abstract This paper shows bank mergers that enhance value upon announcement can be distinguished from those that do not create value. I classify mergers of banking firms according to activity and geographic similarity (focus) or dissimilarity (diversification), and examine the abnormal returns to each group as a result of the merger announcement. Mergers that focus both activity and geography enhance stockholder value by 3.0% while the other types do not create value. Analysis reveals that abnormal returns upon merger announcement increase in relative size of target to bidder, but decrease in the pre-merger performance of targets.

[1]  Y. Amihud,et al.  Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions , 1990 .

[2]  Arthur D. Warga,et al.  The Pricing of Interest‐Rate Risk: Evidence from the Stock Market , 1986 .

[3]  Christopher M. James,et al.  Capital market frictions and the role of internal capital markets in banking , 1997 .

[4]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[5]  Richard S. Ruback,et al.  The Market for Corporate Control: The Scientific Evidence , 2002 .

[6]  F. Modigliani,et al.  DIVIDEND POLICY, GROWTH, AND THE VALUATION OF SHARES , 1961 .

[7]  R. Hubbard,et al.  A Re-Examination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View , 1998 .

[8]  Christopher M. James,et al.  The Takeover Market, Corporate Board Composition, and Ownership Structure: The Case of Banking , 1987, The Journal of Law and Economics.

[9]  J. Boyd,et al.  Consolidation in U.S. banking: Implications for efficiency and risk , 1998 .

[10]  Krishna G. Palepu,et al.  Predicting takeover targets: A methodological and empirical analysis , 1986 .

[11]  Michael Bradley,et al.  Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms , 1988 .

[12]  Andrei Shleifer,et al.  Do Managerial Objectives Drive Bad Acquisitions? , 1989 .

[13]  Anthony M. Santomero,et al.  The Value Effects of Bank Mergers and Acquisitions , 1998 .

[14]  Allen N. Berger,et al.  Économies d'échelle, fusions, concentration et efficacité: L'expérience dans la banque américaine , 1993 .

[15]  William N. Goetzmann,et al.  Mutual Fund Styles , 1996 .

[16]  Allen N. Berger,et al.  The consolidation of the ® nancial services industry : Causes , consequences , and implications for the future , 1999 .

[17]  Charles W. Haley,et al.  The theory of financial decisions , 1974 .

[18]  Allen N. Berger,et al.  The Consolidation of the Financial Services Industry: Causes, Consequences, and Implications for the Future , 1998 .

[19]  S. Rhoades,et al.  A summary of merger performance studies in banking, 1980-93, and an assessment of the "operating performance" and "event study" methodologies , 1994 .

[20]  S. Rhoades.  Merger performance studies in banking, 1980-93, and an assessment of the "operating performance" and "event study" methodologies. (A summary of staff paper prepared 1993-94) , 1994 .

[21]  Frederic S. Mishkin.  Bank Consolidation: A Central Banker&Apos;S Perspective , 1996 .

[22]  Y. Amihud,et al.  Risk Reduction as a Managerial Motive for Conglomerate Mergers , 1981 .

[23]  R. Hubbard,et al.  Executive Pay and Performance: Evidence from the U.S. Banking Industry , 1994 .

[24]  David B. Humphrey,et al.  Megamergers in Banking and the Use of Cost Efficiency as an Antitrust Defense , 1992 .

[25]  Christopher M. James,et al.  The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions , 1984 .

[26]  Charles E. Swanson,et al.  Marketing Research and Analysis , 1970 .

[27]  J. Houston,et al.  The overall gains from large bank mergers , 1994 .

[28]  Allen N. Berger,et al.  The Effects of Bank Mergers and Acquisitions on Small Business Lending , 1997 .

[29]  Jerold B. Warner,et al.  On corporate governance: A study of proxy contests , 1983 .

[30]  J. Stein,et al.  Internal Capital Markets and the Competition for Corporate Resources , 1995 .

[31]  Jeffrey A. Clark.  Economies of scale and scope at depository financial institutions: a review of the literature , 1988 .

[32]  Jerold B. Warner,et al.  Using daily stock returns: The case of event studies , 1985 .

[33]  C. James,et al.  Returns to Acquirers and Competition in the Acquisition Market: The Case of Banking , 1987, Journal of Political Economy.

[34]  Darius Palia,et al.  The managerial, regulatory, and financial determinants of bank merger premiums , 1993 .

[35]  Allen N. Berger,et al.  The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been , 1995 .

[36]  Maureen O'Hara,et al.  Deposit Insurance and Wealth Effects: The Value of Being “Too Big to Fail” , 1990 .

[37]  Marcia Millon Cornett,et al.  The impact of the manager-shareholder conflict on acquiring bank returns , 2003 .

[38]  David B. Humphrey,et al.  Bank Scale Economies, Mergers, Concentration, and Efficiency: The U.S. Experience , 1994 .

[39]  Michael C. Jensen,et al.  The market for corporate control , 1983 .

[40]  N. Travlos,et al.  Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns , 1987 .

[41]  Marcia Millon Cornett,et al.  Changes in corporate performance associated with bank acquisitions , 1992 .