Are Bank Merger Characteristics Important for Local Community Investment?

Using a sample of 3,964 bank mergers during the 1999-2016 period, we examine the effects of merger and local market characteristics on local small business lending through banks' dependence on soft information acquisition relative to technology driven lending. Mergers involving small or in-state acquirers are positively associated with small business loan (SBL) originations in counties where the target bank has a presence, particularly in counties with a larger number of small firms. In contrast, mergers involving large acquirers are associated with fewer SBL originations while those involving out-of-state acquirers have no impact on SBL originations. Analyses of acquirer bank SBL origination activity post-merger corroborate our county-level results. Post-merger, small bank acquirers increase in SBL originations, while large acquirers do not. Examining the behavior of local competitor banks shows that competitors of small acquirers decrease SBL originations, partially offsetting the positive effect associated small bank acquirers. Taken together, our findings underscore the importance of soft information acquisition in small business lending and suggest one-size-fits-all policy solutions are not likely to lead to common outcomes at the local level. Encouraging mergers by small banks and by in-state acquirers can positively affect small business lending and community investment, particularly in counties with a large fraction of small firms.