Merger Activity as a Determinant of De Novo Entry into Urban Banking Markets

Abstract

This paper reflects revisions made for a programming error and to reflect articles published subsequent to the original draft in early 1999. A programming error reversed the signs on all the variables used in our original logit analysis. As a result the 1999 draft of this paper concluded that in-market acquisitions discouraged de novo entry, while this revision concludes just the opposite: in-market acquisitions encourage de novo entry. However, the original draft conclusion that out-of-market acquisition activity does not significantly encourage de novo entry still holds after correcting the programming error. The complex economic variables used in the draft from 1999 were simplified in this version and data for 1998 were added. The increase in both the number of bank (and thrift) mergers and the number of de novo entries has led the press to speculate that these trends are interrelated. Specifically, the media have suggested that out-of-market acquisitions encourage de novo entry. This paper examines the determinants of de novo entry at the individual market level and specifically tests the hypothesis that out-of-market acquisitions lead to de novo entry into that market. This study differs from the earlier literature on the determinants of de novo entry in several respects: (1) Banks and thrifts are treated as full competitors and included in the empirical work. (2) The time frame examined is 1995-1998, a period of record earnings for banks and thrifts. (3) The data for new charters have been scrubbed so that only true de novo entrants are included in the empirical work. A theoretical framework for de novo entry is developed, and logit analysis is applied to all MSAs for the four-year period.