Historically - Historically, financial markets have...

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Historically, financial markets have witnessed several consolidation trends. The year 1998, however, surpassed them all in volume and size of individual deals. This paper utilizes the event study approach to analyze the mega-mergers that took place in the banking industry during 1998, namely that of Travelers Group with Citicorp, NationsBank with BankAmerica, and Bank One with First Chicago NBD. A test of daily abnormal returns is conducted to find out the impact of each of the three mergers on shareholders' wealth from both the acquired and acquirer's perspective. The results obtained indicate that the market's reaction was positive during the on-event sub-period (i.e. days 0 and 1) for both the acquired and acquirer in the Travelers-Citicorp merger; only for the acquirer in the NationsBank-BankAmerica deal, and for the acquired firm in the case of Bank One-First Chicago NBD merger. This study analyzes the cost efficiency implications of megamergers in the U.S. banking industry - mergers and acquisitions in which both organizations exceed $1 billion in assets. Such an analysis is important because the consolidated banks arising from these mergers may well dominate the industry of the future and help determine the overall level of intermediation in the economy. From an industrial organization viewpoint, megamergers in banking also provide an important experiment in which to examine the public policy tradeoff between potential cost efficiency gains from consolidation and potential social efficiency losses from greater exercise of market power. Because megamergers have been relatively rare historically, earlier merger analyses need not generalize to these new combinations among the nation's very largest banks. In our analysis, we set forth some cost efficiency conditions that likely need to be met for bank mergers to be both privately and socially beneficial and test these conditions using data on U.S. banking megamergers from 1981 to 1989. These conditions relate directly to the relative cost efficiencies of the acquiring and acquired bank. To our knowledge, this is the first study to examine direct measures of the cost efficiency of merger participants either pre- or postmerger - prior studies have instead focused on simple cost and revenue ratios which can be biased by not controlling for other factors affecting costs, such as product mix and input prices. Moreover, earlier studies generally have not related the ex post efficiency gains from mergers to the ex ante conditions that are most likely to lead to efficiency improvements. To put the cost efficiency gain versus social efficiency loss issue in perspective, banking industry representatives, consultants, and the trade press have suggested that potential cost savings from bank mergers may justify relaxation of the usual antitrust concerns. Savings as high as 30% of the operating costs of the acquired institution have been
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Historically - Historically, financial markets have...

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