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Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature

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Abstract

This paper provides a review of the recent financial institution mergers and acquisition (M&A) literature covering over 150 studies. Several robust themes emerge in the post-2000 literature. North American bank mergers are (or can be) efficiency improving, although the event-study literature presents a mixed picture regarding stockholder wealth creation. In contrast, European bank mergers appear to have resulted in both efficiency gains and stockholder value enhancement. There is robust evidence linking high CEO compensation to merger activity and strong implications that deals can be motivated by the desire to obtain ‘too-big-to-fail’ status and reap the associated subsidies. Evidence on the impact of both geographic and product diversification via merger is mixed. There is growing evidence that financial institution M&As can adversely impact certain types of borrowers, depositors, and other external stakeholders.

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Notes

  1. Again, see Berger et al. (1999), Dymski (1999), Group of Ten (2001), Amel et al. (2004), and Jones and Critchfield (2005).

  2. A consensus does not imply unanimity. Kwan and Eisenbeis (1999) concluded that bank M&As during the 1990s did create value for shareholders. Kane (2000) found that acquiring stockholders in U.S. bank ‘mega-mergers’ earned positive abnormal returns, and argues that this may be a consequence of access to greater market power and/or regulatory subsidies flowing to TBTF firms.

  3. The event study methodology is not without its critics. Becher (2009, 2000) argued that event ‘windows’ are difficult to identify and are often too narrowly defined as mergers are anticipated by the market well before they are announced publicly.

  4. The earlier literature found potential efficiency gains [see Rhoades (1993), Shaffer (1993), Kohers et al. (2000)], but little evidence that these potential gains were typically realized [see Berger and Humphrey (1992), Linder and Crane (1993) and Focarelli et al. (2002).]

  5. Such efforts may actually be profit maximizing behavior, but the gains realized do not result from the standard efficiency or diversification gains associated with merger related structural changes.

  6. On perhaps a more positive note, there is some evidence that managers do not take account of insider information about bank M&As. Madison et al. (2004) find that target bank insiders significantly decrease both share purchases and share sales prior to merger announcements.

  7. See DeYoung (2007b) for a detailed analysis of the recent evolution of the U.S. banking system.

  8. While van Lelyveld and Knot (2009) do not find evidence of a universal diversification discount they do find substantial variation around the mean valuation of European bank-insurance conglomerates, with (among other things) discounts tending to be larger for bigger conglomerates.

  9. Francis et al. (2008) also find positive cross-border wealth effects for deals involving U.S. non-banks during the 1990s to the early 2000s.

  10. See also Cohen and Mazzeo (2004) and Hannan and Prager (2004).

  11. This study also famously found a positive association between bank mergers and crime rates, with an estimated elasticity of property crime with respect to merger-induced banking concentration of 0.18.

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Authors and Affiliations

  1. University of Kansas, Lawrence, KS, USA

    Robert DeYoung

  2. Federal Reserve Bank of Chicago, Chicago, IL, USA

    Douglas D. Evanoff

  3. Bangor University, Bangor, Wales, UK

    Philip Molyneux

Authors
  1. Robert DeYoung
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  2. Douglas D. Evanoff
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  3. Philip Molyneux
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Correspondence to Robert DeYoung.

Additional information

This paper has benefited from valuable insights from a large number of individuals. We would particularly like to thank Robert Adams, Yener Altunbas, Rym Ayadi, Santiago Carbo, Barbara Casu, Ken Cyree, Franco Fiordelisi, Regina Frank Claudia Girardone, John Goddard, Ken Jones, Ximo Maudos, David Marquez, Fabio Panetta, Evren Ors, Fotios Pasiouras, Klaus Schaek, Jon Williams and John Wilson. All remaining errors, as usual, rest with the authors.

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DeYoung, R., Evanoff, D.D. & Molyneux, P. Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature. J Financ Serv Res 36, 87–110 (2009). https://doi.org/10.1007/s10693-009-0066-7

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