Factors affecting the probability of acquisition and the magnitude of premiums paid to target shareholders: Evidence from the banking industry

Mergers and acquisitions in the banking industry have increased significantly in recent years due, in part, to the growing prospect of interstate banking, increased competition from thrift institutions and other financial intermediaries, and the elimination of regulation Q interest rate ceilings. The determinants of merger and acquisition behavior in the banking industry have only recently become a core issue among academicians, practitioners and regulators. These determinants are particularly relevant for government policymakers because of the diversity of views concerning the ultimate impact of bank mergers on safety, competition, and services provided to customers.;A critical examination of the methodology used in previous bank acquisition studies reveal various limitations which make their reported prediction accuracies unreliable. Variables employed are not determined on the basis of theoretical models that lead logically to their specification. Moreover, other variables that intuitively may contribute materially to the explanatory power of the models have been overlooked or employed out of context.;This dissertation describes an empirical analysis using principal components factor analysis, maximum-likelihood logit analysis, and multiple regression to identify a set of variable which (1) separate banks that have been acquired in interstate acquisition activities during the 1980-1987 period from a matching group of non-acquired banks, and (2) affect the magnitude of premiums paid to target-bank shareholders.;The prediction of acquisition targets is modeled as a function of two types of value creating factors: (a) bank-specific financial characteristics, and (b) market and economic characteristics of the target bank's operating environment. The premium model is derived as a function of five types of value creating factors: (a) bank-specific financial characteristics, (b) economic and operating market environment, (c) regulatory environment, (d) merger structure (tax implications), and (e) bargaining power.;The results obtained from this study support the argument that attractiveness of a potential interstate bank acquisition candidate and variables that affect the magnitude of premiums paid are not solely determined by factors internal to the bank, such as bank-specific financial characteristics, and that all of the above value creating factors must be considered in explaining premium.;The findings reported here have significant implications for the management and shareholders of the acquiring and target firms, individual investors, and regulators. Although the models suggested in this dissertation represent a significant contribution to previous bank acquisition theory, six viable avenues for further research and improvement are identified.