Does Distance between Target and Acquirer Matter for Bank Mergers?

Abstract

Geographical deregulation in the 1980s and 1990s led to a wave of US bank mergers. A still unresolved issue is the role that distance between target and acquirer plays in the performance and efficiency of mergers. In theory, a nearby bank acquisition reduces monitoring costs while a distant acquisition achieves greater risk diversification. By analyzing the efficiency and performance of more than one thousand bank mergers between 1988 and 2002, we find that distance improved bank performance for mergers within a given BHC. In contrast, distance led to a decline in profitability and an increase in risk for mergers of banks from different BHCs. We argue that the BHC structure enables a firm to establish effective monitoring capabilities before consolidating, which allows the BHC to manage far-flung enterprises effectively.