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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
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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    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

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