Determinants of bank merger premiums: An empirical study

This paper examines the financial characteristics and determinants of merger premiums of the target bank and acquiring bank. The study is significant because there are many individuals that should be concerned about the premiums paid in mergers. These individuals include managers of a target bank, managers of an acquiring bank, stockholders, and regulators. The research questions are, which financial ratios and characteristics of the target bank have a statistically significant impact on merger premiums and, which financial ratios and characteristics of the acquiring bank have a statistically significant impact on merger premiums? The sample data was obtained from SNL Securities, a company specializing in gathering and maintaining a database of financial information related to banks, mergers, and acquisitions. Stepwise regression was used to identify relationships between the independent variables and the dependent variable merger premium expressed as the price paid to book value of the target bank.; The results of the stepwise regression confirm that acquiring banks are willing to pay for target banks that are profitable measured by the target's return on equity and for the ability to account for the merger as a pooling of interest. The adjusted R2 in this model is .427 which explains 42.7% of the variation between merger premiums and the independent variables in the model.