Focusing Versus Diversifying Bank Mergers: Analysis of Market Reaction and Long-Term Performance
37 Pages Posted: 30 Jan 2001
Date Written: January 2001
This paper explores the paradox of bank mergers: on average, bank mergers do not create value yet they continue to occur. Using cross-sectional analysis to examine 56 bank mergers between 1991 and 1995, I test several facets of focus and diversification. The study finds that upon announcement the market rewards the mergers of partners that focus their activities and geography. Long-term efficiency, however, is enhanced when the merger involves a relatively inefficient acquirer and payment is not made solely with cash. Long-term stock performance is further enhanced when the surviving firm does not engage in cross-subsidization. The study suggests market participants correctly realize that focusing mergers create value, but investors may need to rethink the facets of focus they value.
Keywords: Banks, mergers, cross-sectional analysis
JEL Classification: G21, G34, C21
Suggested Citation: Suggested Citation