DOMESTIC AND INTERNATIONAL BANK MERGERS: GAINS FROM FOCUSING VERSUS DIVERSIFYING

This dissertation seeks to determine whether an identifiable sub-group of bank mergers creates value upon announcement as well as the factors that are associated with that value creation and the long-term performance of the sub-groups of mergers.; Chapter 1 shows that mergers that enhance value upon announcement can be distinguished from value-destroying mergers in the banking industry. I classify mergers of banking firms according to activity and geographic similarity (focus) or dissimilarity (diversification) and examine the abnormal returns to each group as a result of the merger announcement. Mergers that focus both activity and geography enhance stockholder value by 3.0%; the others destroy value slightly. International mergers enhance value more than U.S. domestic mergers by 1.3%.; Chapter 2 looks at why the announcements of some bank mergers create value. It seeks to establish factors that are associated with the market reaction to those announcements. In general, I find support for some focusing reasons and evidence against diversifying reasons to merge. I find evidence to support an expectation by the market that a merged entity will increase its market power as well as against the economies of scope hypothesis. I also find support for the economies of scale hypothesis as well as the low-efficiency hypothesis that suggests mergers that bring together two underperforming partners create more value than others. For U.S. mergers, I find evidence that market prices reflect the possibility that a merger could effect a wealth transfer from stockholders to debt holders.; Chapter 3 looks at the long-term performance of merged banks. First, I look at long-term stock market returns as well as Q-ratios. Then, I examine standard indicators of profitability, capital adequacy, market power, asset management, operating cost, and liquidity management. I find that merged banks in general decrease their industry-adjusted profitability ratios as well as their insolvency risk. They also significantly increase the market power indicator. Indicators suggest that merged banks engage in less risky, but less lucrative lending. Merged banks also seem to become less efficient. Mergers that focus activity but diversify geographically improve performance more than the other groups following a merger. I find little correlation between abnormal returns upon announcement and changes in performance indicators suggesting that the market is not able to anticipate or to price the benefits of bank mergers.