Market Valuation Effects of Bank Acquisitions

Abstract

As intrastate and interstate bank merger laws have relaxed, the number of bank mergers and acquisitions has risen sharply.1 The shareholders of acquired firms benefit from mergers because they are able to sell their stock at a higher price than would otherwise be the case. Whether the shareholders of the acquiring firm benefit from the transaction is less clear. Acquirers may have superior management or be able to obtain economies of scale or find other methods to increase expected profits and reduce risk to offset the premium paid to shareholders of the acquired organization. However, a recent study by Shome, Smith, and Heggestad (1986) suggests that bank managers are less concerned about maximizing shareholder wealth than managers of nonfinancial firms because the regulatory process for merger approval tends to protect managers from hostile takeovers. They suggest that banking organizations are maintaining suboptimal amounts of capital in order to achieve higher growth rates. If their analysis of bank capital decisions and managerial motives is correct, then it may also be true that some bank acquisitions are undertaken for reasons other than shareholder value.