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Are bank mergers procyclical or countercyclical? Theory and evidence from Taiwan

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  • Wen-Chung Guo
  • Chih-Ching Yang

Abstract

This work develops a theory of countercyclical bank mergers and finds supported empirical evidence in Taiwan. Procyclical (countercyclical) mergers tend to involve higher (lower) measures of merger activities during economic booms than downturns. Several previous studies suggest that bank mergers are procyclical in developed countries, possibly driven by the higher capital liquidity that accompanies an economic expansion. Alternatively, this work emphasizes the role of economic situation and the government in bank mergers. Our results suggest that the depressed industrial situation, which leads to severe competitive market and impoverished revenue basis, drives banks to increase their market share for reducing competition through merger with the merger cost as low as possible by utilizing government's offering and the beneficial condition of stock market. Merger activities may be explained by the motivation of generating higher profit and able to survive, whereas the banks with insufficient competitiveness are more likely to suffer serious loss and thus forced to be merged.

Suggested Citation

  • Wen-Chung Guo & Chih-Ching Yang, 2013. "Are bank mergers procyclical or countercyclical? Theory and evidence from Taiwan," Applied Financial Economics, Taylor & Francis Journals, vol. 23(1), pages 1-14, January.
  • Handle: RePEc:taf:apfiec:v:23:y:2013:i:1:p:1-14
    DOI: 10.1080/09603107.2012.699183
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    File URL: http://hdl.handle.net/10.1080/09603107.2012.699183
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    1. Stavros Peristiani, 1993. "The effect of mergers on bank performance," Research Paper 9313, Federal Reserve Bank of New York.
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    Cited by:

    1. Li-Hua Lai & Li-Chin Hung & Chau-Jung Kuo, 2016. "Do Well-Financial Holding Company Organized Banks in Taiwan Take More Risk?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-30, December.
    2. repec:eee:intfin:v:50:y:2017:i:c:p:69-84 is not listed on IDEAS

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