Determinants of Cost Efficiencies in Bank Mergers (WP 93-1)

Abstract

A thick cost frontier methodology is used to estimate pre- and post-merger cost inefficiency in 348 mergers approved by the OCC in 1987 and 1988. The results are not consistent with the traditional "market for corporate control" story in which well-managed acquirers improve the performance of poorly managed targets. Cost efficiency improved in the majority of mergers, but gains were small and were not related to the acquiring bank's efficiency advantage over its target.

Efficiency improved most often when both merger partners were relatively cost inefficient, suggesting that cost savings depend more on the opportunities facing management than the quality of that management. Banks that made acquisitions frequently were relatively successful at capturing post-merger efficiencies, suggesting a role for experience effects.

Author

Robert De Young