Does Distance between Target and Acquirer Matter for Bank Mergers?

35 Pages Posted: 24 Mar 2008

See all articles by Gary D. Ferrier

Gary D. Ferrier

University of Arkansas - Sam M. Walton College of Business

Timothy J. Yeager

University of Arkansas - Sam M. Walton College of Business

Date Written: March 2007

Abstract

Geographical deregulation in the 1980s and 1990s led to a wave of US bank mergers. A still unresolved issue is the role that distance between target and acquirer plays in the performance and efficiency of mergers. In theory, a nearby bank acquisition reduces monitoring costs while a distant acquisition achieves greater risk diversification. By analyzing the efficiency and performance of more than one thousand bank mergers between 1988 and 2002, we find that distance improved bank performance for mergers within a given BHC. In contrast, distance led to a decline in profitability and an increase in risk for mergers of banks from different BHCs. We argue that the BHC structure enables a firm to establish effective monitoring capabilities before consolidating, which allows the BHC to manage far-flung enterprises effectively.

Keywords: bank mergers, bank performance, geographic diversification

JEL Classification: G1, G2

Suggested Citation

Ferrier, Gary D. and Yeager, Timothy J., Does Distance between Target and Acquirer Matter for Bank Mergers? (March 2007). Available at SSRN: https://ssrn.com/abstract=1107457 or http://dx.doi.org/10.2139/ssrn.1107457

Gary D. Ferrier

University of Arkansas - Sam M. Walton College of Business ( email )

BA418, Dept. of Economics
Fayetteville, AR 72701
United States
501-575-6223 (Phone)

Timothy J. Yeager (Contact Author)

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

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