Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earnings Diversification

George J Benston, William C Hunter and Larry Wall

Journal of Money, Credit and Banking, 1995, vol. 27, issue 3, 777-88

Abstract: This paper examines the prices bid for target banks in the early to mid-1980s. Two hypotheses are examined: (1) the earnings diversification hypothesis which holds that banks would bid more for merger partners that offered risk-reduction opportunities, and (2) the deposit insurance put-option hypothesis, which holds that acquirers would bid more for targets that offered opportunities to increase risk and/or become 'too big to fail.' An empirical analysis of a sample of 302 mergers produces results that are consistent with the earnings diversification hypothesis and inconsistent with the deposit insurance put-option hypothesis. Copyright 1995 by Ohio State University Press.

Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:27:y:1995:i:3:p:777-88

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