Characteristics of acquired firms: the case of the banking industry
| DOI | https://doi.org/10.1108/13581980710835263 |
| Pages | 409-422 |
| Date | 20 November 2007 |
| Published date | 20 November 2007 |
| Author | Scott I. Meisel |
| Subject Matter | Accounting & finance |
Characteristics of acquired firms:
the case of the banking industry
Scott I. Meisel
Morehead State University, Morehead, Kentucky, USA
Abstract
Purpose – The purpose of the paper is twofold: to determine firm characteristics that explain
mergers in the banking industry and to predict the likelihood of a merger.
Design/methodology/approach – A logit model is used to estimate coefficients. The paper also
tests the effect of the Financial Services Modernization Act on market structure and uses a national
sample from 1997 to 2003.
Findings – Results indicate that profitability (PROF), size (SIZE), asset management (ASSETMGT),
and solvency (SOLV) are factors in explaining mergers in the full sample model. Poor ASSETMGT,
large target banks, low PROF, and solvent banks represent merged firms in the full sample model. The
results also indicate that loan activity is not a factor in explaining mergers. It appears that banks
merged before the Financial Services Modernization Act (Pre-1999 Merger Model) are characterized by
poor ASSETMGT, and are solvent. In contrast, the only factor explaining mergers after the Financial
Services Modernization Act (Post-1999 Merger Model) was PROF.
Originality/value – The paper shows that the results for the full sample model and the sub-sample
models are the same except for PROF. This suggests that acquiring banks seek to provide better
management, technology, and access to better markets than the smaller merged banks.
Keywords Acquisitionsand mergers, Financial services, Banks,Financial Services Act
Paper type Research paper
Introduction and literature review
The number of US commercial banks has declined 40 percent since 1984 (Wheelock
and Wilson, 2004). The relaxation of legal impediments to branching and interstate
banking has encouraged merger activity.
There have been studies that have addressed the issue of determinants of premiums
paid for bank acquisitions. For example, Frieder and Petty (1991) used a national
sample of 164 bank deals occurring between 1984 and 1986. The study provided
evidence that profitability (PROF) measured as return on equity (ROE) and growth
proxied by deposit growth and future expected population growth were signific ant
determinants of premiums paid for bank mergers. In addition, charge-offs to total loans
were also significant.
Other studies have used price to book (PRCBK) ratios as the measure of merger
premiums. First, in a study that dates before the interstate bank merger period,
Rhoades (1987) used ordinary least squares on a sample from 1973 to 1983 and found
that growth not PROF drives merger premiums. Second, Fraser and Kolari (1987) used
a multivariate approach to find that return on assets (ROA), ratio of demand to time
deposits, and total equity to total assets (TA) were all positive and significantly related
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The author would like to thank Dr Chien-Chih Peng and Dr Bruce K. Grace of Morehead State
University for their contributions to this paper. In addition, the author would like to thank any
anonymous reviewers for their time and suggestions concerning this paper.
Characteristics of
acquired firms
409
Journal of Financial Regulation and
Compliance
Vol. 15 No. 4, 2007
pp. 409-422
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980710835263
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