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Efficiency vs. agency motivations for bank takeovers: some empirical evidence

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Author Info

  • Alessio De Vincenzo

    ()
    (Bank of Italy)

  • Claudio Doria

    ()
    (Bank of Italy)

  • Carmelo Salleo

    ()
    (Bank of Italy)

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    Abstract

    Bank takeovers result on average in little improvements in performance. This may be due to conflicting driving forces behind them; however these have seldom been studied. We study directly the motivations for bank acquisitions by analyzing the prices paid for them, under the assumption that bankers are willing to pay for what they want. We find that there is no evidence that bankers are ready to pay for possible economies of scale and scope; on the other hand buyers expect to transfer their superior managerial skills to targets. Market power seems to hold little value while entry (or diversification) commands a premium. Agency issues at the buyer are also an important motivation for takeovers: other things being equal acquirers with more free capital are willing to pay more.

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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 587.

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    Date of creation: May 2006
    Date of revision:
    Handle: RePEc:bdi:wptemi:td_587_06

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    Web page: http://www.bancaditalia.it
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    Related research

    Keywords: banking; M&As; pricing; corporate governance; market power;

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    1. Cheng, David C & Gup, Benton E & Wall, Larry D, 1989. "Financial Determinants of Bank Takeovers: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 524-36, November.
    2. Allen N. Berger & Rebecca S. Demsetz & Philip E. Strahan, 1998. "The consolidation of the financial services industry: causes, consequences, and implications for the future," Finance and Economics Discussion Series 1998-46, Board of Governors of the Federal Reserve System (U.S.).
    3. Cornett, Marcia Millon & Hovakimian, Gayane & Palia, Darius & Tehranian, Hassan, 2003. "The impact of the manager-shareholder conflict on acquiring bank returns," Journal of Banking & Finance, Elsevier, vol. 27(1), pages 103-131, January.
    4. Hughes, Joseph P. & Mester, Loretta J. & Moon, Choon-Geol, 2001. "Are scale economies in banking elusive or illusive?: Evidence obtained by incorporating capital structure and risk-taking into models of bank production," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2169-2208, December.
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    6. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    7. Lang, Gunter & Welzel, Peter, 1996. "Efficiency and technical progress in banking Empirical results for a panel of German cooperative banks," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1003-1023, July.
    8. Palia, Darius, 1993. "The Managerial, Regulatory, and Financial Determinants of Bank Merger Premiums," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 91-102, March.
    9. Houston, Joel F. & James, Christopher M. & Ryngaert, Michael D., 2001. "Where do merger gains come from? Bank mergers from the perspective of insiders and outsiders," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 285-331, May.
    10. Altunbas, Yener & Marqués, David, 2008. "Mergers and acquisitions and bank performance in Europe: The role of strategic similarities," Journal of Economics and Business, Elsevier, vol. 60(3), pages 204-222.
    11. Houston, Joel F. & Ryngaert, Michael D., 1994. "The overall gains from large bank mergers," Journal of Banking & Finance, Elsevier, vol. 18(6), pages 1155-1176, December.
    12. Gary Gorton & Richard Rosen, 1992. "Corporate Control, Portfolio Choice, and the Decline of Banking," NBER Working Papers 4247, National Bureau of Economic Research, Inc.
    13. Amel, Dean & Barnes, Colleen & Panetta, Fabio & Salleo, Carmelo, 2004. "Consolidation and efficiency in the financial sector: A review of the international evidence," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2493-2519, October.
    14. DeLong, Gayle L., 2001. "Stockholder gains from focusing versus diversifying bank mergers," Journal of Financial Economics, Elsevier, vol. 59(2), pages 221-252, February.
    15. Bliss, Richard T. & Rosen, Richard J., 2001. "CEO compensation and bank mergers," Journal of Financial Economics, Elsevier, vol. 61(1), pages 107-138, July.
    16. Focarelli, Dario & Panetta, Fabio & Salleo, Carmelo, 2002. "Why Do Banks Merge?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 1047-66, November.
    17. David A. Becher & Terry L. Campbell II, 2004. "Corporate governance of bank mergers," Proceedings 918, Federal Reserve Bank of Chicago.
    18. Cornett, Marcia Millon & Hovakimian, Gayane & Palia, Darius & Tehranian, Hassan, 2003. "Erratum to "The impact of the manager-shareholder conflict on acquiring bank returns" [Journal of Banking and Finance 27(1), pp. 103-131]," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 775-775, April.
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    Cited by:
    1. Mikel Larreina, 2008. "Financial centres in peripheral regions: the effect of the financial services industry on regional economy - the case of the Scottish Financial cluster," CRIEFF Discussion Papers 0805, Centre for Research into Industry, Enterprise, Finance and the Firm.

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