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
management and operations.
The rationale for this new view is that horizontal
bank
mergers would permit the reduction of costs through consolidation
of backoffice and administrative
functions
and, in addition,
the closing of overlapping 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 authors 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 19811986. 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 4th6th 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 threequarters 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
institution, (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 Reserves 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)
c-o

=change in the ratio of total expenses

= 1, if the observation
is a horizontally

to total assets;
consolidated
firm;

This
finding is similar to the findings
of a study of
megamergers
by Berger and Humphrey (1992). They find that in
acquiring bank was more X-enicient than the acquired.
%hange
in expense ratio tests were also conducted
using
total assets as the denominator
in the expense ratio with similar
%hange
in expense ratio tests were also conducted
using the
the control variables with similar results.

the performance
effects of 57
55572% of the merger cases, the
operating
revenues rather than
results.
change rather than the levels of

415

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

DOAG
DOAD
TA
LIA

FG
NBR
LD/TD
si

=O, if the observation

is an other firm;
=percentage
of deposit overlap of the acquiring
acquired firm (other firms have 0% overlap);
=percentage
of deposit overlap of the acquired
acquiring firm (other firms have 0% overlap);
= total assets;
= total loans to total assets;
= firm deposit growth;
= number of branches;
=large
domestic
deposits
(over $100,000) to
deposits;
= 1, if the bank
is located in state i.

firm with

the

firm with

the

total

domestic

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 19811986 indicating
that the total expense ratio for large banks increases relative
to smaller banks. The loan-to-assets
variable (L/A) is negative and statistically 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
essentially the same when the independent
variables
levels.

of interest (C-0,DOAG
and DOAD) are
are specified in terms of changes rather than

128/10,387

148110.146

140/9,867

16619,961

125/10,025

182/10,064

Year

1981

1982

1983

1984

1985

1986

0.9233

0.8910

0.9303

0.9898

I .0854

1.2917

Constant

Regression

0.0040
(0.063)

0.0605
(0.642)

~ 0.0290
(0.489)

- 0.0208
(0.521)

0.0062
(0.125)

Consolidated
firm-other
firm
dummy
(C-O)
___~_
0.1143***
(1.739)

- 0.0003
(0.813)

(1.234)

- 0.0005

-0.0001
(0.148)

0.001 I***
(1.841)

-0.0004***
( 1.754)
3.0318E-9*
(2.808)

0.0225*
( 11.204)
0.0001
(0.864)

-0.0004**
(2.530)
-0.oOcl1
(0.535)

-_

0.0198*
(14.738)

0.0017*
(2.532)

-0.0012*
(9.284)
- o.OtlO9*
(8.082)

0.0018***
( 1.743)

0.0342*
(21.638)

Firm
growth
(FG)

-0.0013*
(9.218)

-0.0022*
(13.086)

Loans/
assets
____-(L/A)

2.0263E - 9**
(2.337)
2.3302E-9*
(3.324)

3.2776E-9*
(2.843)
3.0008E-9*
(3.103)

Total
assets
(TA)
~____

0.0004
(1.139)

-0.0001
(0.289)

-0.0011
(1.715)

Acquired
firm
(DOAD)

overlap

in total expenses to assets by year,

_~___~
variables (c-values in parentheses)
____
~___~_

Table
on changes

-0.0002
(0.687)

- 0.0002
(0.688)

- 0.0002
(0.397)

mergers

for independent

Acquiring
firm
(DOAG)

Deposit

coefficients

bank

o.OOIl4
3.8564E-9*
(0.574)
(2.824)
_
___~___
Coefficients for individual state dummy variables are not reported to conserve space.
*Indicates coefficient is statistically
signilicant at the one percent level (two-tail tests).
**Indicates coefftcient is statistically
significant at the live percent level (two-tail tests).
***Indicates coefftcient is statistically
signilicant at the ten percent level (two-tail tests).

observations
(consolidated/
other)

Of

Number

The effect of horizontal

of

- 0.0002
(1.547)
-0.0003***
(1.932)
__-

-0.0003*
(2.905)
-0.0003*
(3.281)

- 0.0006*
(4.101)
-0.0005*
(4.398)

Number
branches
(NW

___

1981-1986.

0.0029*
(13.725)

0.0024*
(10.733)

0.0012*
(7.738)

-0.0006*
(3.720)

-0.0028*
(16.077)

- 0.0040*
(18.739)

____~

Large deposits/
total deposits
(LDITD)

~_.

R2

0.08

0.08

0.12

0.06

0.10

0.16

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 nonmerging 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,
where the dependent

variables

L/A, LD/TD,

FG, NBR),*

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;
= 1, if change in efficiency quartile is up,
AEQ, =U-D
=O, if change in efficiency quartile is down.
(A firm is classified as moving down if it moves from a higher
quartile to a lower quartile.)

efficiency

The independent
variables in the logit model are the same as in the earlier
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 independent 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,
OLS

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 hypothesis 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 19811986, 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

up YS
unchanged

Down vs
unchanged

Up vs down

LJp vs
unchanged

Down vs
unchanged

Up vs down

up vs
unchanged

Down vs
unchanged

Up vs down

1981

1981

1981

1982

1982

1982

1983

1983

1983

Year

Sample
(efficiency
quartile
change)

0.1441

0.8012

0.6946

-0.6713

0.0173*
(2.926)
0.0074
(1.368)
- 0.0020
(0.346)
0.0064
(1.167)

-0.5351
(0.736)
PO.2092
(0.255)
0.2867
(0.398)

- 0.0066
(1.179)

- 2.9298**
(2.160)

I .5954
(1.318)

1.3668

-0.0030
(0.416)

-0.1385
(0.145)
0.0080
( 1.584)

0.003 I
(0.437)

- 1.6079
( 1.328)

~ 1.4950***
(I ,856)

0.0021
(0.391)

- 1.9415***
(1.791)

0.9445

-0.2355

1.1844

0.6325

Acquiring
firm
(DOAG)

overlap

-0.0052
(0.756)

0.003 1
(0.496)

0.0005
(0.072)

0.0118
(0.902)

-0.0131
(1.149)

0.0032
(0.418)

-0.0139
( 1.492)

0.0176
(1.431)

0.0053
(0.509)

Acquired
firm
(DOAD)

0.0255*
(5.422)

-0.0175*
(4.495)

0.0045
(1.225)

0.0125*
(2.722)

-0.0149*
(3.725)

- 0.0060
(1.566)

0.0179*
(3.912)

-0.0196*
(4.900)

- 0.0028
(0.757)

(L/A)

0.0033
(0.652)

- 0.0011
(0.233)

-0.0018
(0.428)

- 1.2428*
(5.395)

0.4977*
(2.645)

-0.3656*
(3.251)

-0.3283**
(2.232)

0.7700
(0.746)

-0.0173*
(4.023)
0.0255*
(5.189)

-0.2824**
(2.414)

- 0.9g94*
(4.309)

0.5503*
(2.753)

(W __
~_~~~
-0.1130***
(1.721)

0.0070
(1.569)

0.0326*
(6.156)

-0.0212*
(4.609)

( 1.573)

0.0072

Large
deposits/
total
deposits
(LDITD)

1981-1986.

Firm
growth

firms, by year,

in parentheses)

and other

Loans/
assets

(t-values

for merging

variables

quartiles

for independent

in efficiency

Deposit

coefticktts

of changes

Consolidated
firm-other
firm
dummy
(C-O)

Regression

of determinants

constant

Logit analysis

Table

of

-0.0013
(0.913)

-0.0030
( 1.003)

-0.0017
(1.140)

0.0065***
(1.757)

(2.718)
0.0026
(1.238)

0.0086*

-0.0035
(0.964)

0.0032
(1.185)

(1.076)

0.0025

Number
branches
(NW

____

B
3
7
3s
2

?I
2
3
a

9
6
.?
W
9
B
5
%

6
R
?

Down vs
unchanged

Up vs down

up S
unchanged

Down vs
unchanged

Up vs down

Up vs
unchanged

Down YS
unchanged

1984

1984

1985

1985

1985

1986

1986

0.2457

1.3998

2.1459

0.3942

2.1201

1.4180

0.5683

1.2968

3.7604

- 0.7788
(0.897)

0.4749
(0.352)

0.7572
(0.462)

- 0.5300
(0.441)

0.3657
(0.206)

4.5585
(0.809)

0.0227
(0.017)

( 1.064)

-0.0003
(0.0529)

0.0013
(0.204)

-0.0024
(0.384)

0.0017
(0.297)

0.0002
(0.035)

( 1.360)

0.0083

0.0013
(0.181)

0.0138**
(2.568)

0.0016
(0.1857)

- 0.0068
(0.497)

-0.0015
(0.092)

-0.0003
(0.071)

- 0.0049
(0.292)

- 0.0566
(1.017)

-0.0043
(0.342)

-0.0551
(1.582)

- 0.0204*
(5.835)

-0.0098*
(3.001)

0.0151*
(3.438)

-0.0213*
(5.990)

-0.0055
(1.549)

0.0190*
(4.455)

-0.0185*
(5.037)

-0.0017
(0.476)

0.0366*
(7.328)

-0.1247***

-0.0172*
(4.377)

0.5614*
(3.316)

(1.944)

- 1.9398*
(8.911)

0.6785*
(3.764)

-0.9119*
(7.072)

- 1.7362*
(7.591)

0.4783**
(2.450)

- 0.6040*
(4.563)

-0.0280*
(5.248)

0.0175*
(3.701)

-0.0129*
(3.043)

-0.0203*
(3.751)

0.0155*
(3.235)

-0.0063
( 1.479)

1986

Up vs down

2.0720

1.8444
(1.412)

-0.0021
(0.3233)

- 0.0546*
- 1.4383*
0.0110*
- 0.0096
(9.846)
(7.670)
(2.655)
(0.748)
._
___~~
___
._ _
aNote that a downward
movement m eflictency quarttle rellects a decline in efficiency and an Increase m the total expense
*Indicates coefficient is statistically
significant at the one percent level (two-tail tests).
**Indicates coefftcient is statistically
significant at the live percent level (two-tail tests).
***Indicates coefftcient is statistically
significant at the ten percent level (two-tail tests).

up S
unchanged

1984

ratio

0.0062***
(1.898)

- 0.0033
(1.4747)

0.0031
(0.877)

0.0048***
(1.677)

-0.049~**
(1.926)

0.0001
(0.050)

-0.0014
(0.625)

(1.803)

0.0054***

0.0032
(1.321)

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).