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Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earnings Diversification

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  • Benston, George J
  • Hunter, William C
  • Wall, Larry D

Abstract

This paper examines the prices bid for target banks in the early to mid-1980s. Two hypotheses are examined: (1) the earnings diversification hypothesis which holds that banks would 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 of 302 mergers produces results that are consistent with the earnings diversification hypothesis and inconsistent with the deposit insurance put-option hypothesis. Copyright 1995 by Ohio State University Press.

Suggested Citation

  • Benston, George J & Hunter, William C & Wall, Larry D, 1995. "Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earnings Diversification," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 777-788, August.
    • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:3:p:777-88
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