The effect of bank ownership changes on subsidiary-level earnings

  • Sandra L. Chamberlain
Part of the The New York University Salomon Center Series on Financial Markets and Institutions book series (SALO, volume 3)

Abstract

This paper investigates whether mergers improve the profitability of 180 bank subsidiaries acquired between 1981 and 1987. Although profitability is unchanged for acquired subsidiaries relative to non-acquired counterparts, specific earnings components improve. In particular, net interest margins widen, and premises expenses and salaries expenses are reduced in the post-merger period. However, these gains are offset by increases in other non-interest expenses, an amalgamation of expenses related to centralized management such as a management fees, advertising expense, research and development expense, director’s fees, and data processing charges. The change in bank ownership is also associated with increases in loan loss provisions and losses from sales of securities in the year the merger is consummated, raising the possibility that ownership changes lead to changes in subsidiary-level earnings management.

Keywords

Earning Management Paired Difference Control Firm Loan Loss Bank Merger 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Akhavein, Jalal D., Allen M Berger, and David B. Humphrey, 1997, `The Effects of Mega-mergers on Efficiency and Prices: Evidence from a Bank Profit Function,’ Review of Industrial Organization, 12.Google Scholar
  2. Amel, Dean F. and Michael J. Jacowski, 1989, Trends in banking structure since the mid 1970’s, Federal Reserve Bulletin, March, 120–133.Google Scholar
  3. Berger, Allen N., William C. Hunter, and Stephen G. Timme, 1993, `The Efficiency of Financial Institutions: A Review and Preview of Research Past, Present, and Future,’ Journal of Banking and Finance, 17, 221–49.Google Scholar
  4. Clarke, J.A., 1988, “Economies of Scale and Scope at Depository Financial Institutions: A Review of the Literature,” The Economic Review, Sept, 16–33.Google Scholar
  5. Cornett, Marcia Millon and Hassan Tehranian, 1992, `Changes in Corporate Performance Associated With Bank Acquisitions,’ Journal of Financial Economics, 3, 211–234.CrossRefGoogle Scholar
  6. Golembe, Carter H. and David S. Holland, 1981, Federal regulation of banking ( Golembe Associates, Washington).Google Scholar
  7. Golembe, Carter H. and David S. Holland, 1983, Federal regulation of banking 1983–1984 ( Golembe Associates, Washington ).Google Scholar
  8. Golembe, Carter H. and David S. Holland, 1988, Federal regulation of banking 1986–1987 ( Golembe Associates, Washington ).Google Scholar
  9. Hawawini, Gabriel and Itzhak Swary, 1990, Mergers and acquisitions in the U.S. banking industry: Evidence from the capital markets, (Elsevier Science Publishers B.V., North-Holland, Amsterdam).Google Scholar
  10. Hawke, John D. ed., 1982, Banking expansion in the 80’s (Harcourt Brace Janovich, New York). Healy, Paul M., Krishna G. Palepu, and Richard S. Ruback, 1992, Do Mergers Improve Corporate Performance?, Journal of Financial Economics 3.Google Scholar
  11. Hollander, Myles and Douglas A Wolfe, 1973, Nonparametric Statistical Methods ( John Wiley and Sons, New York).Google Scholar
  12. Houstan, Joel F. and Michael D. Ryngaert, 1994, The overall gains from large bank mergers, Journal of Banking and Finance, 18, 1155–1176.CrossRefGoogle Scholar
  13. James, Christopher, 1984, An Analysis of the Effect of State Acquisition Laws on Managerial Efficiency: The Case of Bank Holding Company Acquisitions, Journal of Law and Economics, 27, 211–227.Google Scholar
  14. Jensen, Michael C., 1986, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review, 76, 323–329.Google Scholar
  15. Linder, Jane C. and Dwight B. Crane, 1992, Bank mergers: integration and profitability, Journal of Financial Services Research, 7, 35–55.CrossRefGoogle Scholar
  16. Madura, J. and Kenneth J Wiant, 1994, Long term valuation effects of bank acquisitions, Journal of Banking and Finance, 18, 1135–1154.CrossRefGoogle Scholar
  17. Mandelker, G., 1974, `Risk and Return: The Case of Merging Firms,’ Journal of Financial Economics, 1, 303–335.CrossRefGoogle Scholar
  18. Manne, Henry G, 1965, Mergers and the Market for Corporate Control, Journal of Political Economy, 73, 110–120.CrossRefGoogle Scholar
  19. Marris, Robin, 1964, The Economic Theory of Managerial Capitalism ( Free Press, Glencoe Illinois).Google Scholar
  20. Martin, Kenneth J. and John J. McConnell, 1991, Corporate performance, takeovers, and management turnover, Journal of Finance, 66, 671–687.CrossRefGoogle Scholar
  21. Moyer, Susan E, 1990, Capital Adequacy Ratio Regulations and Accounting Choices in Commercial Banks, Journal of Accounting and Economics, 13, 123–154.CrossRefGoogle Scholar
  22. Pilloff, Steven J., 1996, Performance changes and shareholder wealth creation associated with mergers of publically traded banking institutions, Journal of Money, Credit and Banking, 28, 294–310.Google Scholar
  23. Pilloff, Steven J., 1997, `The Value Effects of Bank Mergers and Acquisitions,’ in Bank Mergers and Acquisitions (Irwin) Y. Amihud, and G. Miller, eds., ???Google Scholar
  24. Rhoades, Stephan A., 1985, Mergers and Acquisitions by Commercial Banks, 1960–1983, Federal Reserve Board Staff Studies No. 142 ( Board of Governors of the Federal Reserve System, Washington ).Google Scholar
  25. Rhoades, Stephan A., 1990 `Billion Dollar Bank Acquisitions: A Note on the Performance Effects’ Mimeograph, Board of Governors of the Federal Reserve System.Google Scholar
  26. Rhoades, Stephan A., 1993, Efficiency effects of horizontal (in-market) bank mergers, Journal of Banking and Finance, 17, 411–422.CrossRefGoogle Scholar
  27. Scherer, F.M., 1980 Industrial Market Structure and Economic Performance, 2nd ed. ( Houghton Mifflin Co, Boston).Google Scholar
  28. Scholes, Myron, G. Peter Wilson and Mark A. Wolfson, 1990, Tax planning, regulatory capital planning and financial reporting strategy for commercial banks, The Review of Financial Studies, 3.Google Scholar
  29. Spindt, Paul A. and Vefa Tarhan 1992, `Are There Synergies in Bank Mergers?’ Working Paper Tulane University.Google Scholar
  30. Srinivasan Aruna and Larry D. Wall, 1992, `Cost Savings Associated with Bank Mergers,’ Working Paper 92–2 Federal Reserve Bank of Atlanta.Google Scholar
  31. Stigler, George J, 1950, Monopoly and Oligopoly by Merger, American Economic Review, 40, 2334.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 1998

Authors and Affiliations

  • Sandra L. Chamberlain

There are no affiliations available

Personalised recommendations