The Effect of Bank Mergers on Loan Prices: Evidence from the U.S.
Ohio State University (OSU) - Department of Finance
April 30, 2009
Fisher College of Business Working Paper No. 2006-03-002 and Charles A. Dice Center Working Paper No. 2006-19
Bank mergers can increase or decrease loan spreads, depending on whether the increased market power outweighs efficiency gains. Using proprietary loan-level data for U.S. commercial banks, I find that, on average, mergers reduce loan spreads, with the magnitude of the reduction being larger when post-merger cost savings increase. My results suggest that the relation between spreads and the extent of market overlap between merging banks is non-monotonic. Market overlap increases cost savings and consequently lowers spreads, but when the overlap is sufficiently large, spreads increase, potentially due to the market-power effect dominating the cost savings. Furthermore, the average reduction in spreads is significant for small businesses.
Number of Pages in PDF File: 56
JEL Classification: G21, G28, G34
Date posted: March 15, 2006 ; Last revised: May 1, 2009