Journal of Banking and Finance 17 (1993) 411422. North-Holland

Efficiency effects of horizontal (in-market) bank mergers

Stephen A. Rhoades”

Federal Reserve Board, Washington, DC 20551, USA

Final version received December 1992

This study conducts tests to determine whether banks involved in horizontal mergers achieve efficiency improvements relative to other firms. The analysis covers 898 bank mergers from 1981 to 1986. Efficiency is measured by various expense ratios. The results based on OLS and logit analysis are robust. They indicate that during 1981-1986, horizontal bank mergers did not yield efficiency gains. Notably, the findings are based on the mergers believed to be most likely to result in efficiency gains, i.e., they are horizontal mergers, the firms exhibit considerable deposit overlap, and the acquiring firms are, on average, more efficient than the acquired.

1. Introduction

In the last couple of years, it has been argued frequently that horizontal (within-market) bank mergers provide a vehicle for reducing operating costs. In the past, cost reductions and efficiency gains from bank mergers were predicted to result from economies of scale. Now that numerous studies of economies of scale in banking have shown such economies to be nonexistent or small,’ cost reductions are predicted to result from improved manage- ment and operations. The rationale for this new view is that horizontal bank mergers would permit the reduction of costs through consolidation of back- office and administrative functions and, in addition, the closing of over- lapping offices. That is an empirical question, which this paper will examine. In studying this question, it is important to distinguish between cost reductions and efficiency gains. Cost reductions can occur by cutting employees, reducing branches, and so forth. However, such reductions in costs do not necessarily increase efficiency. That is, such reductions in costs may be accompanied by corresponding reductions in assets, which represents

Correspondence to: Stephen A. Rhoades, Mail Stop 149, Federal Reserve Board, Washington, DC 20551, USA.

*The views expressed herein are the author’s and do not necessarily reflect the views of the Federal Reserve Board. I extend thanks to Allen Berger, Douglas Evanoff, and Larry Wall for helpful comments on the paper. I also extend thanks to Lynn Flynn for excellent research assistance and to Rhonda Underwood for excellent typing.

‘For a review of this literature, see Humphrey (1990).

0378-4266/93/SO6.00 c) 1993-Elsevier Science Publishers B.V. All rights reserved

412 S.A. Rhoades, Ef3ciency effects of horizontal hank mergers

shrinkage of the firm rather than improvements in efftciency. Thus, the efficiency effects of mergers are the subject of this study.

Since predictions of efficiency gains from improvements in management and operations, as opposed to scale economies, are fairly recent, there have been relatively few studies of the issue.2 Fewer still have focused on horizontal mergers [Srinivasan and Wall (1992) and Berger and Humphrey (1992)].” While the potential for efficiency gains appears to exist according to Berger and Humphrey (1991), most studies do not generally find evidence of such gains.

Since it has been argued that efficiency gains are most likely from horizontal mergers, this study analyzes the efficiency effects of an unusually large sample of 898 horizontal bank mergers and acquisitions during 1981- 1986. Tests are conducted to determine whether there is an increase in efficiency, as measured by various expenses-to-assets ratios, of merged firms relative to other firms between the three years before merger and the 4th-6th years after merger. Both OLS and logit procedures are used for testing.4

2. Sample and data

The analysis proceeds by comparing (1) the change in the expense ratios of merging and nonmerging banks and (2) the likelihood of a change in efftciency quartiles by merged banks relative to others5 The use of three years of data both before and after merger is intended to average out unusual expense items and approximate long-term expense performance. The post-acquisition analysis examines the average expense ratio during the 4th- 6th years after acquisition to ensure that there is sufhcient time for the merged firm to achieve reductions in operating costs and for the expense ratios (averaged over three years) to approximate the new long-term expense performance of the merged firm. 6 Using a time period this long after the merged allows other things to occur that could affect the data. However, since the merged firms are compared with a large control group, this should essentially control for other factors that affect the data. Expense ratios and

*See Rhoades (1986) Rhoades (1990). Linder and Crane (1991) Spindt and Tarhan (1991), Srinivasan and Wall (1992) Srinivasan (1992), Berger and Humphrey (1992) and Cornett and Tehranian (1992).

3T~o studies simulated mergers rather than directly investigating efticiency effects of mergers. One study simulated 72 large horizontal mergers and found no evidence of efficiency gains. See Savage (1991). A simulation of mergers by Shaffer (1993) yielded mixed results.

&The terms merger and acquisition are used interchangeably throughout the paper. “A comparison is also made of the expense ratios of merging and nonmerging banks both

before and after a horizontal merger. Results of these tests are similar to the other results but are not presented to conserve space.

‘Discussions with a number of bank consultants and analysts indicate that virtually all cost savings should be achieved in three years at the outside, with as much as one-half to three- quarters achieved in year one.

S.A. Rhoades, Efficiency effects of horizontal bank mergers 413

other data for the merged firm are on a merged basis both before and after acquisition.’

The overall sample is composed of banks engaged in horizontal mergers and all ‘other’ banks, for each of the years 1981-1986. The sample of banks engaged in horizontal mergers is based on a listing of all bank mergers and acquisitions during each of the years 1981-1986.8 That listing excludes mergers in which (1) there is a failing firm, (2) one of the merger partners is a foreign institution, (3) one of the partners is a nonbank depository institu- tion, (4) there is a corporate reorganization, and (5) the merging parties are commonly owned by a bank holding company or otherwise, prior to the merger. Merged firms are selected for the sample of horizontal mergers if the partners have overlapping operations in terms of having any offices located in the same market, where market is defined as a Metropolitan Statistical Area (MSA) or non-MSA county. It is also required that the sample of merged firms contain the same firms in both the before and after merger tests. That is, if data are available for a particular pair of merger partners after the merger but not before the merger, or vice versa, that merger is not included in the sample.’

Nonmerging or other banks are included if they were not involved in an acquisition during the year under investigation and were not subsidiaries of any bank holding company making acquisitions during the year. Unlike for the sample of merged firms, there is no requirement that data be available both before and after acquisition in order for an ‘other’ firm to be included in the sample.” Consequently, the large sample of other firms will not include exactly the same firms in the pre- and post-merger tests, but the much smaller pre-and post-merger sample of merged firms, for a given year, will be identical.’ ’

Because of the emphasis on the reductions in noninterest expenses achievable by horizontal mergers, some descriptive data on noninterest expense ratios for the merging firms are of interest. The data indicate that the acquired firms (on average) in horizontal mergers during 1981-1986

‘If the acquiring firm is a bank holding company, data for the acquiring firm are consolidated over all banks in the holding company. If the acquiring firm is a bank owned by a holding company, the data used are for the acquiring bank rather than the holding company.

“This listing is constructed from information in the Annual Reports of the FDIC and Comptroller of the Currency, the Federal Reserue Bulletin, the Federal Reserve’s analysis of competition, and various tiles on banking structure.

‘If a firm made more than one acquisition in a year, it is included separately for each acquisition.

“The acquiring firms have an average asset size of $1.8-$2.5 billion depending on the year under investigation. The comparable figures for the targets are $100 million-$500 million.

“The other tirms in the sample are banks, not consolidated within holding companies, A smaller sample of ‘other’ banking organizations is also tested. It includes only those banks that have at least 75 percent of their deposits in any one market of the acquired tirm. Test results based on the smaller sample (about one-quarter the size of the primary sample) are essentially the same.

414 S.A. Rhoades, Ej,,ciency eifects of horizontal bank mergers

consistently have higher noninterest expenses to assets than the acquiring firms. This means that, on average, the mergers in the sample are the type that are generally regarded as the ones most likely to yield efficiency gains, i.e. a more efficient firm acquiring a less efficient firm.” Before merger, the noninterest expense ratio for the consolidated firms is usually very close to the ratio of the acquiring firms. However, by the 4th-6th years after merger, the consolidated firms have a considerably higher ratio than the consolidated firms before merger in five out of six years. Overall, the data indicate that the acquiring firms have lower noninterest expenses to assets than the firms they acquire, but the acquirers are generally not successful in reducing the expense ratios of the combined firms. Indeed, the data indicate that noninterest expenses of the combined firms actually increase. Examination of data for the control group of other (nonmerging) firms indicates that the general increase in noninterest expenses to assets experienced by consolidated firms from before to after merger does not reflect industrywide tendencies. Finally, the data indicate that while there is considerable variation in the degree of deposit overlap or ‘horizontalness’ among the horizontal mergers in the sample, the sample is dominated by substantially horizontal mergers.

3. Tests

Two sets of test results are presented. One is an OLS analysis of changes in expense ratios of merged and other banks from the pre- to post-merger period. The other is a logit analysis of the likelihood of a change in efficiency quartiles from before to after merger by merged banks relative to others.

3.~. Change in expense ratio tests

Tests comparing the change in total expense ratiosI of horizontally merging and other firms use a regression model that incorporates variables reflecting the extent of office overlap and a number of control variables.14 The OLS tested for each of the years 1981-1986 is as follows:

A(TE/TA)=f(C-O,DOAG,DOAD, TA,LIA, FG,NBR,LDITD,S,),

where

A(TE/TA) =change in the ratio of total expenses to total assets; c-o = 1, if the observation is a horizontally consolidated firm;

“This finding is similar to the findings of a study of the performance effects of 57 megamergers by Berger and Humphrey (1992). They find that in 55572% of the merger cases, the acquiring bank was more X-enicient than the acquired.

‘%hange in expense ratio tests were also conducted using operating revenues rather than total assets as the denominator in the expense ratio with similar results.

‘%hange in expense ratio tests were also conducted using the change rather than the levels of the control variables with similar results.

S.A. Rhoades, Efficiency effects of horizontal bank mergers

=O, if the observation is an ‘other’ firm;

DOAG =percentage of deposit overlap of the acquiring acquired firm (‘other’ firms have 0% overlap);

DOAD =percentage of deposit overlap of the acquired acquiring firm (‘other’ firms have 0% overlap);

TA = total assets;

LIA = total loans to total assets; FG = firm deposit growth; NBR = number of branches;

415

firm with the

firm with the

LD/TD =large domestic deposits (over $100,000) to total domestic deposits;

si = 1, if the bank is located in state i.

The dependent variable is calculated as the change in the average of the total expense ratio for the three years before to the 4th-6th years after merger. The independent variables number of branches (NBR) and deposit overlap (DOAG and DOAD) are for the year before merger; the firm growth variable (FG) is the percentage change in deposits over the three years before merger; and the remaining independent variables are averages over the three years before merger.’ 5

The independent variable of primary interest in this analysis is a binary variable (C - 0) that distinguishes between firms that consolidated in a given year and all other firms. If horizontal bank mergers result in increased efficiency (lower expense ratios) this variable should have a negative sign. Two other important variables in this analysis are included to account for the extent of deposit overlap of the merging firms (DOAG and DOAD). Mergers of firms with overlapping offices (as measured by deposits in a market) are hypothesized to reduce costs and increase efficiency, so this variable should have a negative sign.

The independent variables are included to control for major factors likely to influence bank expenses. A firm size variable (TA) is included to account for possible efticiencies associated with size.16 This is, however, a simple proxy that may reflect other size-related tendencies. A loan-to-asset ratio (L/A) accounts for the fact that banks incur greater expenses maintaining a portfolio of loans than a portfolio of securities, the primary alternative earning asset for banks. A high rate of firm growth (FG) is consistent with aggressive management and could be expected to result in relatively high total expenses.

The number of branches (NBR) is included to account for the various

“All balance sheet and income statement data are from Call Reports, foreign and domestic, for relevant years.

“Most of the substantial literature on economies of scale in banking linds little indication of efficiency benefits from size per se. For a discussion of this literature, see Humphrey (1990).

416 S.A. Rhoades, Efficiency effects of horizontal bank mergers

personnel and physical plant expenses associated with maintaining branches. A variable measured by the ratio of large deposits (over $100 k) to total deposits (LD/TD) is included as an indicator of management aggressiveness in seeking loanable funds and the relative importance of higher cost large deposits. Finally, a dummy variable is included to control for various factors associated with the state in which a bank operates.

Test results for OLS equations using the change in total expenses to assets from before to after merger are presented in table 1. The results for the dummy variable (C-O) are of particular interest because this variable serves to compare the pre- to post-merger change in the ratio of total expenses to assets for horizontally consolidating and other firms. The C-O variable is generally statistically insignificant indicating that consolidated firms total expenses to assets do not decrease relative to other firms. In other words, contrary to the hypothesis, there is no indication of efficiency gains from horizontal bank mergers, based on total expense ratios. The deposit overlap variables, DOAG and DOAD, are not generally statistically significant and signs are somewhat mixed. These results indicate that, contrary to the hypothesis, horizontal mergers with a relatively large degree of overlap do not result in efficiency gains as measured by the ratio of total expenses to assets.

Results for the control variables are discussed only briefly. The total asset size variable (TA) is positive and statistically significant in all years 1981- 1986 indicating that the total expense ratio for large banks increases relative to smaller banks. The loan-to-assets variable (L/A) is negative and statisti- cally significant in five of six equations indicating that the total expense ratio tends to decline from before to after merger for banks with a high loan ratio relative to other banks. The firm growth variable (FG) is positive and statistically significant in five of the six equations. These results indicate that rapidly growing firms tend to experience an increase in their total expense ratio relative to slower growing firms, from before to after merger. The number of branches variable (NBR) has an unexpected negative and statistically significant sign in five of six equations. These findings suggest that a larger number of branches, after controlling for asset size, is associated with relatively decreasing total expense ratios. The large deposits-to-total deposits variable (LD/TD) yields mixed results. In the equations for 1984, 1985 and 1986, LD/TD is positive and statistically significant, but it is negative and statistically significant in the equations for 1981-1983. The 1981-1983 results are consistent with the expectation that banks with a high LD/TD ratio will tend to have an increase in expense ratios relative to firms with a smaller ratio.17

“As noted above, results on the key variables of interest (C-0,DOAG and DOAD) are essentially the same when the independent variables are specified in terms of changes rather than levels.

Tab

le

1

The

ef

fect

of

ho

rizo

ntal

ba

nk

mer

gers

on

ch

ange

s in

to

tal

expe

nses

to

as

sets

by

ye

ar,

1981

-198

6.

_~__

_~

Reg

ress

ion

coef

fici

ents

fo

r in

depe

nden

t va

riab

les

(c-v

alue

s in

pa

rent

hese

s)

____

~_

__~_

__

_ ~_

. N

umbe

r C

onso

lidat

ed

Dep

osit

over

lap

Of

firm

-oth

er

obse

rvat

ions

fi

rm

Acq

uiri

ng

Acq

uire

d T

otal

L

oans

/ Fi

rm

Num

ber

of

Lar

ge

depo

sits

/ (c

onso

lidat

ed/

dum

my

firm

fi

rm

asse

ts

asse

ts

grow

th

bran

ches

to

tal

depo

sits

Y

ear

othe

r)

Con

stan

t (C

-O)

(DO

AG

) (D

OA

D)

(TA

) (L

/A)

(FG

) (N

W

(LD

ITD

) R

2 __

_~_

~___

_ __

__-

1981

12

8/10

,387

1.

2917

0.

1143

***

- 0.

0002

-0

.001

1”“’

3.

2776

E-9

* -0

.002

2*

0.03

42*

- 0.

0006

* -

0.00

40*

0.16

(1

.739

) (0

.397

) (1

.715

) (2

.843

) (1

3.08

6)

(21.

638)

(4

.101

) (1

8.73

9)

1982

14

8110

.146

I .

0854

0.

0062

-

0.00

02

-0.0

001

3.00

08E

-9*

-0.0

013*

0.

0018

***

-0.0

005*

-0

.002

8*

0.10

(0

.125

) (0

.688

) (0

.289

) (3

.103

)

1983

14

0/9,

867

0.98

98

- 0.

0208

-0

.000

2 0.

0004

2.

0263

E

- 9*

* (0

.521

) (0

.687

) (1

.139

) (2

.337

)

1984

16

619,

961

0.93

03

~ 0.

0290

-0

.000

4***

0.

001

I***

2.

3302

E-9

* (0

.489

) ( 1

.754

) (1

.841

) (3

.324

)

1985

12

5/10

,025

0.

8910

0.

0605

-

0.00

05

-0.0

001

3.03

18E

-9*

(0.6

42)

(1.2

34)

(0.1

48)

(2.8

08)

1986

18

2/10

,064

0.

9233

0.

0040

-

0.00

03

o.O

OIl

4 3.

8564

E-9

* (0

.063

) (0

.813

) (0

.574

) (2

.824

) _

___~

___

“Coe

ffic

ient

s fo

r in

divi

dual

st

ate

dum

my

vari

able

s ar

e no

t re

port

ed

to

cons

erve

sp

ace.

*I

ndic

ates

co

effi

cien

t is

sta

tistic

ally

si

gnili

cant

at

th

e on

e pe

rcen

t le

vel

(tw

o-ta

il te

sts)

. **

Indi

cate

s co

efft

cien

t is

st

atis

tical

ly

sign

ific

ant

at

the

live

perc

ent

leve

l (t

wo-

tail

test

s).

***I

ndic

ates

co

efft

cien

t is

sta

tistic

ally

si

gnili

cant

at

th

e te

n pe

rcen

t le

vel

(tw

o-ta

il te

sts)

.

(9.2

18)

-0.0

012*

(9

.284

)

- o.

OtlO

9*

(8.0

82)

-0.0

004*

* (2

.530

)

-0.o

Ocl

1 (0

.535

)

( 1.7

43)

0.00

17*’

(2

.532

)

0.01

98*

(14.

738)

0.02

25*

( 11.

204)

0.00

01

(0.8

64)

-_

(4.3

98)

-0.0

003*

(2

.905

)

-0.0

003*

(3

.281

)

- 0.

0002

(1

.547

)

-0.0

003*

**

(1.9

32)

__-

(16.

077)

-0.0

006*

0.

06

(3.7

20)

0.00

12*

0.12

(7

.738

)

0.00

24*

0.08

(1

0.73

3)

0.00

29*

0.08

(1

3.72

5)

____

~

418 S.A. Rhoades, Efficiency effects of horizontal bank mergers

3.6. Logit analysis

The logit analysis is based on an approach to studying efficiency gains from mergers used by Berger and Humphrey (1991). Merging and nonmerg- ing firms are assigned to one of 10 asset size classes (ranging from &$lO million to over $10 billion) based on their average total assets for the three years before merger as well as for the 4th-6th years after merger. Within each size class, each firm is assigned to an efficiency quartile both before and after merger, based on its ratio of total expenses to assets in each of those periods.

Using the data described above, three samples of firms are used for testing. The three samples include firms in which their efficiency quartile went (1) down or remained unchanged, (2) up or remained unchanged, and (3) up or down, from before to after merger. Because these quartile change categories are used as the dependent variable, a logit analysis is appropriate for testing. Logit equations are estimated for each of the three samples of firms for each of the years 1981-1986. The logit equation is as follows:

AQi =(C-O,DOAG,DOAD, L/A, LD/TD, FG, NBR),‘*

where the dependent variables are

A EQ r = U - UN = 1, if change in efficiency quartile is up, =O, if efficiency quartile is unchanged;

A EQ2 = D - UN = 1, if change in efftciency quartile is down, =O, if efficiency quartile is unchanged;

AEQ, =U-D = 1, if change in efficiency quartile is up, =O, if change in efficiency quartile is down.

(A firm is classified as moving down if it moves from a higher efficiency quartile to a lower quartile.)

The independent variables in the logit model are the same as in the earlier OLS model, with the exception of the TA variable (accounted for by the use of size classes) and 50 state dummy variables. As in the OLS model, the C-O variable, which distinguishes between merged and other firms, is the indepen- dent variable of primary interest. Under the hypothesis that consolidated firms are more likely than other firms to experience a relative increase in efficiency from before to after merger, it is expected that the C - 0 variable will have signs of +, -, and + in the equations based on samples in which the binary dependent variable reflecting quartile change is U - UN, D - UN,

“In order to get the logit model to run, the 50 state dummy variables are not included in the model and every third ‘other’ (nonmerging) bank is dropped from the sample after the banks are arrayed in ascending order by expense ratio, within each size class. The total assets (TA) variable is not included in the logit model because, for these tests, firms are assigned to size classes to control for size.

S.A. Rhoades, Efficiency effects of horizontal bank mergers 419

or U-D, respectively. The deposit overlap variables are both expected to have signs of +, -, and + reflecting the likelihood that mergers of firms with the greatest degree of deposit overlap will experience an increase in efficiency quartiles relative to other firms.

Test results for the logit analysis are presented in table 2. The main linding is that the C- 0 variable, which distinguishes between consolidated and other firms, is generally not statistically significant, contrary to the hypo- thesis that consolidated firms will experience an increase in efficiency. Moreover, in the three equations where it is statistically significant, C - 0 has a negative sign, contrary to the hypothesis. These findings are consistent with the earlier tests indicating that merged firms are no more likely to experience an increase in efficiency than other firms. The deposit overlap variables (DOAG and DOAD) are also generally not statistically significant. These results indicate that, contrary to the hypothesis, the degree of deposit overlap of merging firms has no significant influence on the likelihood of gains (or losses) in efficiency.

A third set of tests was also conducted but is not presented because they may be the weakest tests and in order to conserve space. These are separate pre- and post-merger OLS tests with noninterest expenses to assets as the dependent variable and including a dummy variable (for merged and other firms) to determine whether merged firms have a different ratio of noninterest expenses to assets. The test results indicate there is no statistically significant difference in the noninterest expense ratio between merged and other firms in either the pre- or post-merger period.

Since this analysis is based on all horizontal mergers, it is dominated by smaller mergers. The findings, however, are similar to findings in studies based on only large mergers, such as Berger and Humphrey (1992).

4. Summary and conclusion

Recently a great deal of attention has been focused on the possibility of efficiency gains from bank mergers, especially horizontal mergers. This study conducts various tests to determine whether horizontal bank mergers result in efficiency improvements relative to other firms.

The results are quite consistent across years, different types of tests, and different expense measures. Specifically, the results indicate that during 1981- 1986, horizontal bank mergers did not have a significant effect on efficiency relative to other banks. Furthermore, a greater degree of deposit overlap between merging banks has no effect on bank efficiency. It is also notable that the acquiring banks, on average, are more efficient than the target banks. Thus, the mergers analyzed in this study are of the type thought to have the greatest potential to result in efficiency gains.

In conclusion, the results of this study indicate consistently that horizontal

Year

1981

1981

1981

1982

1982

1982

1983

1983

1983

Tab

le

2

Log

it an

alys

is

of

dete

rmin

ants

of

ch

ange

s in

ef

fici

ency

qu

artil

es

for

mer

ging

an

d ot

her

firm

s,

by

year

, 19

81-1

986.

Reg

ress

ion

coef

tickt

ts

for

inde

pend

ent

vari

able

s (t

-val

ues

in

pare

nthe

ses)

’

Dep

osit

over

lap

Sam

ple

(eff

icie

ncy

quar

tile

chan

ge)

cons

tant

up

YS

0.63

25

unch

ange

d

Dow

n vs

1.

1844

un

chan

ged

Up

vs d

own

-0.2

355

Con

solid

ated

fi

rm-o

ther

fi

rm

dum

my

(C-O

)

Acq

uiri

ng

Acq

uire

d L

oans

/ fi

rm

firm

as

sets

(D

OA

G)

(DO

AD

) (L

/A)

Lar

ge

depo

sits

/ to

tal

depo

sits

(LD

ITD

)

_

Y

Firm

gr

owth

(W

~_~~

~ __

-0.1

130*

**

(1.7

21)

0.55

03*

(2.7

53)

- 0.

9g94

* (4

.309

)

b k __

_ 6 D

R

Num

ber

of

?

bran

ches

(NW

9 6’

0.00

25

.?

W

(1.0

76)

9 B

0.00

32

5 (1

.185

) %

LJp

vs

0.94

45

unch

ange

d

Dow

n vs

1.

3668

un

chan

ged

Up

vs

dow

n -0

.671

3

up

vs

unch

ange

d

Dow

n vs

un

chan

ged

Up

vs d

own

0.69

46

0.80

12

0.14

41

- 1.

9415

***

0.00

21

0.00

53

- 0.

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0.

0072

(1

.791

) (0

.391

) (0

.509

) (0

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) ( 1

.573

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1.60

79

0.00

3 I

0.01

76

-0.0

196*

-0

.021

2*

( 1.3

28)

(0.4

37)

(1.4

31)

(4.9

00)

(4.6

09)

-0.1

385

-0.0

030

-0.0

139

0.01

79*

0.03

26*

(0.1

45)

(0.4

16)

( 1.4

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(6.1

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0.

0070

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(I ,8

56)

( 1.5

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66)

(1.5

69)

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422 S.A. Rhoudes, Efficiency ejfects of horizontal bank mergers

bank mergers during 1981-1986 did not generally result in efficiency gains. Given the great deal of variation in bank efficiency reported by Berger and Humphrey (1991) and the emphasis on cost cutting in the banking industry during the past couple of years, it would seem that the potential exists for observing efficiency gains in more recent bank mergers. However, in view of the failure to find any tendency toward efficiency gains in this study from a large number of earlier mergers of the type believed to provide the greatest opportunity for efficiency gains (i.e. horizontal mergers, a high degree of office overlap, and the acquirer being more efficient than the acquired), it would seem necessary to require evidence that the potential for gains can generally be realized before accepting the argument.

References

Berger. A.N. and D.B. Humphrey, 1991. The dominance of inefficiencies over scale and product mix economies in banking, Journal of Monetary Economics 28, 117-148.

Berger, A.N. and D.B. Humphrey, 1992, Megamergers in banking and the use of cost efficiency as an antitrust defense, Antitrust Bulletin, Fall.

Cornett. M.M. and H. Tehranian, 1992, Changes in corporate performance associated with bank acquisitions, Journal of Financial Economics, forthcoming.

Humohrev. D.B.. 1990. Whv do estimates of scale economies differ?, Economic Review. Federal R&e&e Bank of Richmond, Sept./Ott., 38850.

Linder, J.C. and D.B. Crane, 1991, Bank mergers: Integration and profitability, Working paper 91.038 (Harvard Business School).

Rhoades, S.A., 1986, The operating performance of acquired firms in banking before and after acquisition, Staff Study no. 149 (Federal Reserve Board).

Rhoades, S.A., 1990. Billion dollar bank acquisitions: A note on the performance effects, Mimeo. (Federal Reserve Board).

Savage, D.T., 1991. Mergers, branch closings, and cost savings, Mimeo. (Federal Reserve Board). Shaffer. S., 1993. Can megamergers improve bank efficiency?, Journal of Banking and Finance

17, 4233436 (this issue). Spindt, P.A. and V. Tarhan, 1992, Are there synergies in bank mergers?, Working paper (Tulane

University) Nov. Srinivasan, A.. 1992, Are there cost savings from bank mergers?, Economic Review, Federal

Reserve Bank of Atlanta, Mar.;Apr., 17-28. Srinivasan. A. and L.D. Wall. 1992, Cost savings associated with bank mergers, Mimeo. (Federal

Reserve Bank of Atlanta).