“Estimation of the Impact of Mergers in the Banking Industry” by Xiaolan ZHOU
It is well-documented that merging banks make adjustments in post-merger bank branch density. Mergers are usually accompanied by substantial entry and exit. These phenomena contradict a widely-used assumption of merger prediction: product quality and entry are exogenous. This paper aims to develop a methodology of merger analysis that incorporates the impact of mergers on product quality and entry. To avoid multiple equilibria, I estimate the post-merger patterns of product quality by exploiting the historical data on bank mergers. Combining them with the estimates of demand and supply, I simulate the post-merger equilibria of thirteen cases of bank mergers. Most of the predicted post-merger branch densities and market shares of merging institutions are closer to the actual outcomes than the widely used sum of pre-merger branch densities and market shares of merging banks respectively, which tend to overestimate post-merger branch densities and market shares for large banks. There are two main findings on post- merger patterns. First, a reduction in the branch density of merging banks is strongly associated with the presence of highly overlapped pre-merger bank branch networks or large pre-merger market shares of merging banks. Second, new entrants tend to arise in counties where the total county income is high.