Bidding theory and bank merger premiums: the impact of structural and regulatory factors

The pricing of bank merger transactions is examined using a new conceptual approach. The theory of auctions and bidding provides a conceptual framework for developing hypotheses regarding the pricing of bank mergers. The underlying hypothesis is that the value premiums paid to effect a bank merger relative to earnings and book value are established in an auction market where the control of individual banking firms is traded. Examination of over 500 US bank mergers from 1979 to 1987 that involved verifiable changes in corporate control indicates that several of the hypothesized relationships predicted by auction and bidding theory are tentatively supported by the regression results. An important determinant of merger pricing appears to be the character of state banking regulation.