DETERMINANTS OF BANK ACQUISITION PREMIUMS: ISSUES AND EVIDENCE

Larry A. Frieder and Phillip N. Petty

Contemporary Economic Policy, 1991, vol. 9, issue 1, 12-24

Abstract: The recent interstate bank merger phenomenon has received little attention in the literature. Specifically, existing studies fail to explain sufficiently the variation of premiums paid and fail to investigate adequately the bank merger wave in terms of its interstate banking context. This study employs models with substantial overall explanatory levels. The interstate banking context proves to be very significant. First, the study considers and finds significant the effective date of a state's interstate statute in relation to a deal's announcement date. This contrasts sharply with other studies. Second, the study uses and also finds significant a binary variable distinguishing intrastate deals from interstate deals. The premiums paid for interstate market entry, on average, exceeded those paid for intrastate transactions. Third, including regional binary variables reveals a pattern of variation in pricing throughout the country. The Southeast, the study's base of comparison, exhibited the highest premium level. Other significant determinants of premiums paid include profitability as measured by returns on equity, growth proxied by state deposit growth and future expected population growth, and charge‐offs to total loans as an indicator of loan quality.

Date: 1991
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