IDEAS home Printed from https://ideas.repec.org/a/bap/journl/150306.html
   My bibliography  Save this article

What Motivates Banks and Other Financial Services Firms to Merge? An Empirical Analysis of Economic and Institutional Factors

Author

Listed:
  • Ralph Sonenshine

    (American University, Department of Economics 4400 Massachusetts Avenue, NW, Washington, DC 20016, U.S.A.)

  • Evan Kraft

    (American University, Department of Economics 4400 Massachusetts Avenue, NW, Washington, DC 20016, U.S.A.)

Abstract

With globalization and deregulation, the financial services industry in many areas has consolidated significantly since the mid-1990s. What drove financial services mergers among key segments and geographic regions? This paper uses a comprehensive data set comprising 1,434 mergers in 62 countries from 1995-2011 to explore empirically the motivations behind financial services mergers, examining the factors that impact the deal premium paid to effectuate the merger. We find stronger regulatory environments, especially lower corruption, to have a positive effect on the synergies projected to arise from financial services mergers. In contrast, higher financial freedom levels were found to have a negative impact on the deal premium. Also, higher measured levels of legal protection are associated with higher deal premiums in banking mergers, though the opposite is true for insurance. Acquirers also pay higher premiums to purchase targets that are relatively small and easier to integrate. Finally, there is evidence that acquirers pay more to consummate cross-border versus domestic mergers, a result driven by cross-border, investment banking mergers.

Suggested Citation

  • Ralph Sonenshine & Evan Kraft, 2015. "What Motivates Banks and Other Financial Services Firms to Merge? An Empirical Analysis of Economic and Institutional Factors," Review of Economics & Finance, Better Advances Press, Canada, vol. 5, pages 66-82, August.
    • Handle: RePEc:bap:journl:150306
    as

    Download full text from publisher

    File URL: http://www.bapress.ca/ref/ref-article/1923-7529-2015-03-66-17.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Focarelli, Dario & Pozzolo, Alberto Franco, 2001. "The patterns of cross-border bank mergers and shareholdings in OECD countries," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2305-2337, December.
    2. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, "undated". "The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function," Finance and Economics Discussion Series 1997-09, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    3. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, vol. 41(2), pages 193-229, June.
    4. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    5. Brealey, R. A. & Kaplanis, E. C., 1996. "The determination of foreign banking location," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 577-597, August.
    6. Jean Arcand & Enrico Berkes & Ugo Panizza, 2015. "Too much finance?," Journal of Economic Growth, Springer, vol. 20(2), pages 105-148, June.
    7. Ralph Sonenshine & Kara Reynolds, 2014. "Determinants of cross-border merger premia," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(1), pages 173-189, February.
    8. Uhde, André & Heimeshoff, Ulrich, 2009. "Consolidation in banking and financial stability in Europe: Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1299-1311, July.
    9. Yamori, Nobuyoshi, 1998. "A note on the location choice of multinational banks: The case of Japanese financial institutions," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 109-120, January.
    10. Hagendorff, Jens & Hernando, Ignacio & Nieto, Maria J. & Wall, Larry D., 2012. "What do premiums paid for bank M&As reflect? The case of the European Union," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 749-759.
    11. Allen N. Berger & Robert De Young & Gregory F. Udell, 2001. "Efficiency Barriers to the Consolidation of the European Financial Services Industry," European Financial Management, European Financial Management Association, vol. 7(1), pages 117-130, March.
    12. DeLong, Gayle L., 2001. "Stockholder gains from focusing versus diversifying bank mergers," Journal of Financial Economics, Elsevier, vol. 59(2), pages 221-252, February.
    13. Buch, Claudia M. & DeLong, Gayle, 2004. "Cross-border bank mergers: What lures the rare animal?," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2077-2102, September.
    14. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    15. Grosse, Robert & Goldberg, Lawrence G., 1991. "Foreign bank activity in the United States: An analysis by country of origin," Journal of Banking & Finance, Elsevier, vol. 15(6), pages 1093-1112, December.
    16. James R. Barth & Gerard Caprio Jr. & Ross Levine, 2001. "Banking Systems around the Globe: Do Regulation and Ownership Affect Performance and Stability?," NBER Chapters, in: Prudential Supervision: What Works and What Doesn't, pages 31-96, National Bureau of Economic Research, Inc.
    17. Goldberg, Lawrence G. & Grosse, Robert, 1994. "Location choice of foreign banks in the United States," Journal of Economics and Business, Elsevier, vol. 46(5), pages 367-379, December.
    18. James, Christopher M & Wier, Peggy, 1987. "Returns to Acquirers and Competition in the Acquisition Market: The Case of Banking," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 355-370, April.
    19. Wezel, Torsten, 2004. "Foreign Bank Entry into Emerging Economies: An Empirical Assessment of the Determinants and Risks Predicated on German FDI Data," Discussion Paper Series 1: Economic Studies 2004,01, Deutsche Bundesbank.
    20. Cybo-Ottone, Alberto & Murgia, Maurizio, 2000. "Mergers and shareholder wealth in European banking," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 831-859, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alicia Garcia-Herrero & Daniel Navia Simon, 2006. "Why Banks go to Emerging Countries and What is the Impact for the Home Economy? A Survey," Working Papers 0602, BBVA Bank, Economic Research Department.
    2. Berger, Allen N., 2003. "The efficiency effects of a single market for financial services in Europe," European Journal of Operational Research, Elsevier, vol. 150(3), pages 466-481, November.
    3. Alberto Franco Pozzolo, 2009. "Bank Cross-Border Mergers and Acquisitions: Causes, Consequences, and Recent Trends," Springer Books, in: Alberto Zazzaro & Michele Fratianni & Pietro Alessandrini (ed.), The Changing Geography of Banking and Finance, edition 1, chapter 0, pages 155-183, Springer.
    4. Focarelli, Dario & Pozzolo, Alberto Franco, 2008. "Cross-border M&As in the financial sector: Is banking different from insurance," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 15-29, January.
    5. Berger, Allen N. & Buch, Claudia M. & DeLong, Gayle & DeYoung, Robert, 2004. "Exporting financial institutions management via foreign direct investment mergers and acquisitions," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 333-366, April.
    6. Byung Wook Jun & Sung Man Yoon, 2020. "Foreign Banks Acquisition Strategy and the Business Approach of Domestic Bank: A Case of Standard Chartered Bank," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(7), pages 861-874, July.
    7. Köhler, Matthias, 2008. "Transparency of Regulation and Cross-Border Bank Mergers," ZEW Discussion Papers 08-009, ZEW - Leibniz Centre for European Economic Research.
    8. Berger, Allen N. & Dai, Qinglei & Ongena, Steven & Smith, David C., 2003. "To what extent will the banking industry be globalized? A study of bank nationality and reach in 20 European nations," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 383-415, March.
    9. Herrero, Alicia Garcia & Martinez Peria, Maria Soledad, 2007. "The mix of international banks' foreign claims: Determinants and implications," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1613-1631, June.
    10. Annick Pamen Nyola & Alain Sauviat & Amine Tarazi, 2022. "How does regulation affect the organizational form of foreign banks' presence in developing versus developed countries?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2367-2419, April.
    11. Robert DeYoung & Douglas Evanoff & Philip Molyneux, 2009. "Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature," Journal of Financial Services Research, Springer;Western Finance Association, vol. 36(2), pages 87-110, December.
    12. Clare, Andrew & Gulamhussen, Mohamed Azzim & Pinheiro, Carlos, 2013. "What factors cause foreign banks to stay in London?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 739-761.
    13. Molyneux, Philip & Nguyen, Linh H. & Xie, Ru, 2013. "Foreign bank entry in South East Asia," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 26-35.
    14. Dario Focarelli & Alberto Franco Pozzolo, 2005. "Where Do Banks Expand Abroad? An Empirical Analysis," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2435-2464, November.
    15. Claudia Champagne & Lawrence Kryzanowski, 2008. "The Impact of Past Syndicate Alliances on the Consolidation of Financial Institutions," Financial Management, Financial Management Association International, vol. 37(3), pages 535-570, September.
    16. Köhler, Matthias, 2010. "Transparency of regulation and cross-border bank mergers," ZEW Discussion Papers 08-009 [rev.], ZEW - Leibniz Centre for European Economic Research.
    17. Sungho Choi & Bill B. Francis & Iftekhar Hasan, 2010. "Cross‐Border Bank M&As and Risk: Evidence from the Bond Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 615-645, June.
    18. Annick Pamen Nyola & Alain Sauviat & Amine Tarazi, 2017. "How Does Regulation Affect the Organizational Form of Banks' Presence in Developing and Developed Countries?," Working Papers hal-01369658, HAL.
    19. Asimakopoulos, Ioannis & Athanasoglou, Panayiotis P., 2013. "Revisiting the merger and acquisition performance of European banks," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 237-249.
    20. Stijn Claessens & Neeltje Van Horen, 2014. "Location Decisions of Foreign Banks and Competitor Remoteness," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(1), pages 145-170, February.

    More about this item

    Keywords

    Financial services mergers and acquisitions; Cross-border mergers and acquisitions; Foreign direct investment; Deal premium; Banking regulation;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bap:journl:150306. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Carlson (email available below). General contact details of provider: http://www.bapress.ca .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.