RFS Advance Access published online on May 5, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp034
The Effect of Bank Mergers on Loan Prices: Evidence from the United States
Ohio State University
Send correspondence to Isil Erel, Fisher College of Business, Ohio State University, 832 Fisher Hall, 2100 Neil Avenue, Columbus, OH 43210; telephone: 614-292-5174; fax: 614-292-2418. E-mail: erel_1{at}fisher.osu.edu.
JEL Classification: G21, G28, G34
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Abstract |
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Bank mergers can increase or decrease loan spreads, depending on whether the increased market power outweighs efficiency gains. Using proprietary loan-level data for U.S. commercial banks, I find that, on average, mergers reduce loan spreads, with the magnitude of the reduction being larger when postmerger cost savings increase. My results suggest that the relation between spreads and the extent of the market overlap between merging banks is nonmonotonic. The market overlap increases cost savings and consequently lowers spreads, but when the overlap is sufficiently large, spreads increase, potentially due to the market-power effect dominating the cost savings. Furthermore, the average reduction in spreads is significant for small businesses.
I am indebted to my advisors Stewart Myers, Steve Ross, and Antoinette Schoar for their encouragement, guidance, and very helpful discussions. Many thanks are due to Allen Berger for valuable conversations and to Diana Hancock and Tom Brady for their help in getting access to the data set. I would also like to acknowledge helpful comments and suggestions from my discussants, Astrid Dick, Steve Drucker, Rich Rosen, and Tony Saunders, two anonymous referees, and also from Bob Avery, Bill Bassett, Nittai Bergman, Ron Borzekowski, Serdar Dinc, Alex Edmans, Mark Flannery, Paolo Fulghieri, Tim Hannan, Eric Heitfield, Dirk Jenter, Fadi Kanaan, Jon Karpoff, Jiro Kondo, Kai Li, Harold Mulherin, Volkan Muslu, Oguzhan Ozbas, Dimitris Papanikolaou, Daniel Paravisini, Mitchell Petersen, Steve Pilloff, Robin Prager, Paola Sapienza, Rene Stulz, Amir Sufi, Haluk Unal, Mike Weisbach, Egon Zakrajsek, seminar participants at the 2005 Bank Structure Conference of the Federal Reserve Bank of Chicago, the 5th Annual Banking Research Conference of the FDIC Center for Financial Research, 2005 FMA Annual Meetings, 2006 Conference on Corporate Finance of Financial Intermediaries at Wharton, UCLA (Andersen), UNC (Kenan-Flagler), UTD, Bilkent University, Federal Reserve Bank of Chicago, Indiana University (Kelley), Koc University, MIT (Sloan), Ohio State University (Fisher), Sabanci University, and the Universities of Georgia (Terry), Michigan (Ross), Oregon (Lundquist), Rochester (Simon), and Washington at Seattle. Laura Kawano provided excellent research assistance in obtaining the data. Part of this research was conducted when I was a dissertation intern at the Board of Governors of the Federal Reserve System. All errors are mine.