On the Wealth Effects of Merging Banks’ Rivals Empirical Evidence for US Bank Mergers

Abstract: Using a unique sample of 425 bank mergers in the US announced between 2000 and 2008 this paper provides clear evidence supporting the collusion and productive efficiency hypotheses. By analyzing 425 bank mergers and a total of 1112 possible rivals, our analysis shows that the majority of transactions can be explained by at least one abnormal return pattern attributed to either the collusion, productive efficiency, acquisition probability or pre-emptive merger hypothesis. In contrast to previous empirical literature starting with Eckbo (1983), however, we find evidence that wealth effects of the rivals of merging banks can be explained best by the collusion and productive efficiency hypotheses. Methodically, we extend previous approaches considerably by proposing a rivalry index incorporating balance sheet data as well as firm characteristics in order to identify the merging banks' rivals. Empirical results of our main analysis also hold when performing several robustness checks. Using random scaling factors, we find that our main results are not sensitive to a change in the scaling factors that determine our rivalry index. Moreover, our main results are robust to a change of the method for computing abnormal returns