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Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Increasing Operating Net Cash Flow

Paper:ewp-test/9312022
From: Stephen Whigham <   > 
Date: Wed Dec 29 14:32:04 1993

Title: Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Increasing Operating Net Cash Flow
Author: William C. Hunter (Federal Reserve Bank of Atlanta), Larry D. Wall (Federal Reserve Bank of Atlanta) and George J. Benston
Comments: Paper published April 1992, revised July 1993; 17 pages; Report No.: FRB Atlanta Working Paper Series No. 92-4

Abstract:

Abstract: This paper examines the prices bid for target banks in the early to mid-1980's. Two hypotheses are examined: (1) the operating-net-cash-flow hypothesis, which holds that banks should 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 302 mergers produces results that are consistent with the operating-net-cash-flow hypothesis and inconsistent with the deposit insurance put-option hypothesis.

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