The Determinants of Bank Mergers: A Revealed Preference Analysis

Abstract

We provide new estimates of merger value creation by exploiting revealed preferences of merging banks within a matching market framework. We find that merger value arises from cost efficiencies in overlapping markets, relaxing of regulation, and network effects exhibited by the acquirer-target matching. Beyond our findings, the revealed preference method has notable advantages that warrant its application beyond the bank merger market. Notably, we show the method outperforms reduced form alternatives out of sample, enables sensible counterfactual experiments, and that it can be used to evaluate private-to-private mergers, which have been understudied due to lack of stock market data.

Keywords: mergers, matching, empirical matching models, antitrust, maximum score estimation, banking

JEL Classification: G34, C14, C78