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FDIC Banking Review

Footnotes: Predicting Merger Activity

1 Public Law 103-328, 108 STAT.2338-2381 (September 29, 1994).

2 In states that permit statewide branching, a single state or federal bank charter would be all that is needed to operate within the state. In states that place geographic restrictions on branching within the state, several separately chartered banks might be required to operate a larger statewide franchise.

3 See Billett, Coburn and O'Keefe (1995) for a discussion of the FDIC's resolution methods.

4 The number of mergers and consolidations was obtained from the FDIC's corporate database on the structure of the banking and thrift industries. Detailed records are maintained for each merger and consolidation transaction from both the acquirer's and the target bank's perspective. The total number of merger and consolidation transactions an acquirer is involved in over a specific time period is, therefore, equal to the number of individual banks assumed. For example, the consolidation of four affiliated banks into an assuming bank's charter would be counted as four consolidations. Mergers of nonaffiliated banks were measured similarly.

5 See Rose (1987), (1988) for comprehensive studies of merging banks' characteristics. Rose and others have sought to identify merger motives and the traits of acquirers and target banks through financial ratio analysis. Mean financial ratios of groups of acquirers (targets) are compared to those of peer groups to identify areas of importance. In addition, statistical logit analysis is used to identify significant differences between acquirers and nonacquiring banks. These two techniques are employed in this study for similar purposes.

6 See Houston and Ryngaert (1994) for a comprehensive study of the overall gains in large- bank mergers. Houston and Ryngaert find that for a sample of large-bank mergers the positive merger-related returns to targets are offset by negative returns to acquirers. This result does not support the efficiency gains hypothesis.

7 A proof of this statement can be found in most textbooks on investment theory. See, for example, Financial Theory and Corporate Policy, by Thomas E. Copeland and J. Fred Weston, Addison Wesley Publishing Co., Philippines, (1979): pp. 153-154.

8The DOJ and the FTC first published their merger guidelines in 1968 and have periodically revised and clarified those guidelines. See, Horizontal Merger Guidelines, April 2, 1992, issued by the DOJ and the FTC.

9 See Scherer (1980) for a discussion of merger motives and the potential for third-party influences on merger decisions.

10 For a discussion of the possible distortions of financial ratios resulting from merger accounting see O'Keefe (1992), pp. 23-24.

11 See Billett, Coburn and O'Keefe (1995) for a discussion of FDIC-assisted mergers and the unique nature of the transactions.

12 Significance tests were done using Student's "t" statistics of mean differences in financial ratios. A 95-percent confidence level was used as the criterion in all significance tests.

13 A discussion of logit analysis can be found in Maddala (1983).

14 The HHI is a measure of product market concentration and measures market shares across competitors in a market. The HHI is defined as the sum of squared market shares for all competitors in a well-defined geographic or product market. High HHI values occur when one or a few sellers possess large market shares, while lower HHI values occur with a larger number of competitors with lower individual market shares.

15 Several variations of equation 1 were also tested. The additional terms tested included measures of regional location, alternative measures of profitability (return on assets and return on equity), nonperforming assets, total noninterest expense, and composite CAMEL ratings. The results of those models were similar to those found with equation 1, which yielded the strongest predictive results.

16 In logit estimation the estimated coefficient, k, indicates how a change in the independent variable it is associated with, xk, changes the natural logarithm of the ratio of the probability of merging (either as an acquirer or target bank), to the probability of not merging in the estimation time interval.

17 The pseudo R2 statistic is equal to 1 minus the ratio of the log of the likelihood function maximized with all the explanatory variables included in the model, to the log of the likelihood function maximized in the model with none of the explanatory variables included (except the intercept). See Maddala (1984).

18 See Judge, et. al. (1985), p. 767.

19 See Billett, Coburn, and O'Keefe (1995) for a discussion of these assurances.

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