The Distribution of Outcomes from Corporate Mergers: Evidence from Commercial Bank Acquisition Strategies

Abstract

Bank mergers in the United States have reshaped the structure of American banking into an increasingly consolidated industry. Yet the merger literature in banking, like the literature for most other industries, reaches sharply conflicting conclusions regarding the outcomes for merging banking firms, their shareholders, and the public, due perhaps to variable agency cost exposures and competitive market structures. Drawing on a random sample of more than 1,200 acquiring and acquired U.S. banking firms from 1970 through 1988, the study finds a nearly symmetric distribution of increasing and decreasing ex post returns to equity capital in the post-merger period. The acquiring banking firms experiencing increasing equity-capital returns displayed evidence of superior labor productivity in asset and revenue generation as well as enjoying postmerger increases in market concentration. Acquiring institutions also benefitted from faster ex post capital growth when they acquired banking firms operating in more concentrated banking markets. The positive market-concentration, post-merger-return relationship found in the study highlights the importance of a continuing active role for antitrust policy in protecting the public interest from an excessive concentration of market power in the hands of a few banks. Some takeovers enhance economic efficiency, some degrade it, and the balance of effects, though not fully known, is most likely a close one. Scherer (1988)