Incentives for Banking Megamergers: What Motives Might Regulators Infer from Event-Study Evidence?

Abstract

Methodologically, this paper frames the opportunity cost of any merger as the value of the alternative deals it precludes or defers. This challenges the standard event-study hypothesis that stock markets benchmark the value of a merger deal by the profits the partners would have earned in stand-alone activity. Substantively, the paper finds that megamergers in banking show two size-related exceptions to the prototypical result that acquirer stock value tends to be unaffected or to fall when a merger is announced. Giant U.S. banking organizations gain value from becoming more gigantic and gain additional value when they absorb an in-state competitor. FINANCIAL INSTITUTION MERGERS and acquisitions are dramatically remolding at least five dimensions of l:J.S. and global banking competition. Dimensions changing most markedly include the number of leading players, their product lines, their front-office and back-office technologies, their geographic reach, and their average size. In the United States, the Bank Holding Company Act assigns central banlers the duty of assessing the private and societal benefits that derive from combinations of very large financial institutions. To fulfill this duty, staff economists seek to identify the motives of each would-be acquirer (Amel 1997). Unfortunately, merger partners often have good reason to hide their true motives from government officials. Virtually every merger application projects improvements in efficiency or portfolio diversification. Authorities must routinely doublecheck the plausibility of these projections. They must also search for private benefits that may flow from increases in monopoly power, managerial entrenchment, or political clout. To evaluate a given merger, regulators must solve three problems. First, they must decide which of the eight possible reasons for merging listed in Table 1 actually apply. Next, they must estimate whether each proposed combination promises